Earlier this week, four state attorneys general filed two separate lawsuits seeking to stop a clique of private equity firms from swiping $4 billion from the massive supermarket chain they own. It was a frankly shocking turn of events, given that, as anyone who has ever worked for one can attest, looting companies is quite literally what private equity firms do.
Crazier still is what happened Thursday night: A judge granted the Washington AG’s motion for a temporary restraining order, ordering the private equity guys to hold off on their cash grab, scheduled to go down on Monday, pending the results of a preliminary hearing on Nov. 10.
Private equity firms have sucked hundreds of billions of dollars out of American companies since the pandemic began. There may be no less blatant case that these extractions have helped drive America’s broader inflation crisis than Albertsons, the grocery conglomerate whose private equity owners, namely Cerberus and Apollo, announced on Oct. 14 an audacious plan to sell the company to the grocery chain Kroger for $25 billion. That deal would create a 5,000-store, $220 billion colossus that the two companies promised would invest billions of “cost savings from synergies” to “enhance the customer experience” and “[raise] associate wages” and oh, by the way, also in the more immediate term spend “up to $4 billion” on a special dividend to Albertsons shareholders payable Nov. 7, a move the companies explained would commensurately reduce the price Kroger pays for Albertsons to $27.25 a share.
If you shop (or used to shop) at an Albertsons-owned supermarket—Safeway, Jewel-Osco, Vons, and Acme are the company’s other biggest brands—you know where that $4 billion is coming from. Albertsons has been far and away the most aggressive markup-wielder of the major grocers. Its 27 percent gross margins tower over Kroger’s 22 percent and Costco’s 13 percent. A San Francisco Chronicle survey of the prices of 15 grocery staples found that Safeway’s were the single-highest of 10 area grocery chains, including Whole Foods; a Retail Watchers user in Irvine, California, compared the prices of an order of groceries from Albertsons they had purchased in 2019 to the same order in 2022 and found that the prices had risen 75 percent in three years. Such gouging helps explain the baffling disparity between the price hikes Americans have been forced to endure on their groceries (up 13.5 percent in August 2022) versus those of restaurant food (up just 8 percent the same month). One industry is heavily concentrated and monopolistic, while the other is fragmented and competitive.
Now in its defense, Albertsons needs to gouge customers because 16 years of private equity ownership have left the company with $7.2 billion in long-term debt, $5.5 billion in operating lease obligations, billions more in underfunded pension obligations and $1.75 billion in a debt-like “hybrid” bondage to Apollo. The company spent more than $1.5 billion on rent and interest expenses in 2020, and those costs are likely to rise fast as interest rates continue to rise. That is the mathematically inevitable result of allowing a specialized class of money managers to use anonymous LLCs to acquire companies with minuscule down payments and nothing on the line if the burden of servicing that debt drives the company into bankruptcy—a business practice that was opposed by 71 percent of Americans all the way back in 2019, before the avalanche of supply-chain snafus, rampant shortages, runaway inflation, and overall dysfunction that was worsened over the last two years by that practice’s proliferation throughout the economy.
Thanks to the pandemic and the cost-of-living crisis of the last year and a half that it helped fuel, Albertsons is in a far stronger position than most private-equity-portfolio companies, having taken its ratio of debt to EBITDA (that’s earnings before interest, taxes, depreciation, and amortization) from a barely solvent 6.7 in 2018 to a more manageable sub-3.5 in 2022, building up a cash stockpile of $3.39 billion. But its bonds still have “junk”-level credit ratings, and its leases are likely pegged to inflation. Raining down $4 billion on shareholders right now will almost certainly desiccate Albertsons workers and customers. Stores may shut down; your $10.85 quart of ice cream may well go to $13; and as the Washington state lawsuit points out, expect to start making road trips to find baby formula, because Albertsons will be $4 billion less likely to pay its vendors on time.
And sabotaging its own massive supermarket chain could be Cerberus and Apollo’s whole intention, as the attorneys general of Washington, D.C., Illinois, and California pointed out in their federal lawsuit, because these firms can only get their $25 billion if the deal goes through, and antitrust regulators have been known to award “failing firm defense” exemptions to anticompetitive mergers if the acquired firm is in severe financial distress. From the lawsuit:
Discovery may reveal that the “Special Dividend” reflects a calculated effort to leave Albertsons just battered enough for Defendants to argue later (to regulators or a court) that it is a “flailing” or “failing” firm that Kroger should be allowed to acquire lest it go out of business anyway, but still worth its hard assets and Kroger’s gain from neutralizing a competitor.
Now, as the Washington state AG points out in his own state’s lawsuit, the parties involved here are all too familiar with the joys of “failing” one’s way into a monopoly. Back in 2014, when Albertsons acquired the then–publicly traded Safeway, it volunteered to divest 143 stores in overlapping regions to a Seattle-based “competitor” called Haggen, a regional chain consisting of 18 Pacific Northwest stores that had (surprise, surprise) been recently acquired by a private equity firm. Haggen paid about $300 million for the stores, then turned around and sold the underlying real estate of about half of the stores for about $300 million, which the private equity firm used to pay itself a special dividend. The Haggen deal unraveled within weeks, and by the end of 2015 the whole chain was in bankruptcy court, where it sued Albertsons for deliberately sabotaging the divested stores (by allegedly screwing with its computer systems, raiding all the canned and packaged goods in the stores and leaving Haggen with all the perishable inventory) and then sold off half of them for pennies on the dollar to … Albertsons. (Albertsons settled that lawsuit for $5.75 million, a substantial sum considering Haggen’s private equity owners’ obvious shared culpability.) “The parallels to the Albertsons Safeway merger are troubling,” the lawsuit says. “The Attorney General’s Office is rightly and deeply concerned that past may be prologue.”
But even if $4 billion cash grab isn’t part of a diabolical conspiracy to circumvent antitrust law to force an illegal merger, the D.C. lawsuit maintains, it still, in itself, constitutes an unlawful restraint of trade under Section 1 of the Sherman Act:
But whatever the motivation, the antitrust laws do not care: Defendants have an agreement that, as detailed herein, will have an anticompetitive effect on competition among supermarkets in the District of Columbia, California, and Illinois, and that is sufficient basis for this Court to stop the Special Dividend from being paid, and protect consumers and workers in all the States… By stripping Albertsons of necessary cash at a time when its deteriorating bond ratings will make access to capital harder for Albertsons, this agreement between Kroger and Albertsons curtails Albertsons’ ability to compete on price, services, other quality metrics, and innovation. Because it increases Albertsons’ leverage, empirical economics suggests this reduction in Albertsons’ competitiveness will reduce the intensity of price competition market-wide.
And that there is the real showstopper. Because the devolution described above, wherein the current norm that views every realm of commercial activity as first and foremost a vehicle for shareholder cash extraction, ultimately strips our workplaces and vital infrastructure of their ability to function normally—well, welcome to America, where everything from the hospitals to the airlines to the dental clinics to the railroads to Boeing has been brought to its knees by the same predictable cycle of gratuitous junk debt imposed to fund gratuitous shareholder payouts that must then be paid off through round after round of gratuitous layoffs and price hikes. Our ruling class spent $882 billion on stock buybacks in 2021—but couldn’t be bothered to fix the leaky roof of the plant that produces a quarter of the nation’s infant formula. Private equity is a misleading euphemism for the malign force responsible for this great ponzification of our institutions; in the 1980s everyone just called it “corporate raiding” because that’s what it was.
For years a sad community of union activists and finance geeks has been laboring tirelessly to outlaw its worst abuses. They’ve taken road trips to New York to rally outside the headquarters of KKR and Apollo and gotten arrested outside BlackRock; testified at congressional hearings and galvanized around a robust law, the Stop Wall Street Looting Act, that would actually target the problem at its root in the systemic abuse of the bankruptcy code.
And for years the struggle to essentially “make stealing illegal again” has culminated in just about nothing. Private equity is more powerful than ever; the Stop Wall Street Looting Act will never make it out of committee, and that’s with Democrats in control of both houses of Congress. What I’ve learned in years of interviewing workers in private equity–controlled companies is that, no matter how rock-bottom bad things seem, they can always get worse. (Just take it from residents of the KKR-owned chain of nursing homes where health inspectors repeatedly found no staffers at all during their visits to the facilities after the famous private equity firm immortalized in Barbarians at the Gate added an extra $2 billion in debt to the balance sheet.)
But what if, as the state AGs are now contending, “Wall Street looting” is already illegal? Because it chokes off the resources necessary for institutions to meaningfully “compete” in the marketplace, thereby violating a whole host of long-neglected prohibitions on anticompetitive restraints of trade?
What this argument lacks in Old Testament moral outrage, it makes up for in its appeal to a critically important group of attorneys: antitrust enforcers. Unlike bankruptcy or securities law, enforcing antitrust law is the business of elected officials, many of whom have found it an increasingly useful tool for attacking the unchecked power of companies victimizing their constituents. Antitrust law also happens to be in the throes of a kind of renaissance, driven by a small group of scholars who at some point realized that their forefathers had left them a toolbox for contending with the abuses of corporate concentration and monopoly power, and that those tools were so politically popular most of them had never actually been repealed, just marginalized and forgotten as a combination of monopoly denial doctrine exemplified by Robert Bork’s “consumer welfare standard” and the real life “benevolence” of monopolies like Walmart and Amazon conspired to consign the Sherman Act to the proverbial dustbin.
But while the antitrust resurrectionists have succeeded spectacularly at shifting the political vibes around Big Tech and other conspicuous monopolies like Ticketmaster and the airline cartel, private equity and the associated problem of ponzification poses a new challenge, because where monopolies are associated with size and strength, Wall Street looting so often leaves companies smaller and weaker. This is also in some part by design: The founding fathers of private equity were masters of exploiting antitrust enforcement to cobble together diversified conglomerates that just evaded violating the strict merger prohibitions of the 1960s, at swallowing the unwanted divestitures of those conglomerates in the 1970s and 1980s, and at snapping up companies that were No. 2 or 3 in an industry and thus less likely to invite scrutiny than the big name blue chips. Albertsons and Kroger, for their part, have made the need to “compete with Walmart” the centerpiece of their public argument that their merger will actually be good for competition, rather than undermining it.
In the real world, Walmart, for all its brutality, is competing harder for your business than Safeway—its CEO even credited an influx of “upper income customers looking for value” for the recent spike in its own grocery sales on its most recent earnings call—while avoiding competition altogether is the central occupation of private equity, whose default strategy of using savage staff cuts and aggressive price hikes to bankroll hefty cash payouts would never actually work if markets were legitimately “competitive.” Take it from Apollo Advisors, which declared in its 2020 annual report: “We seek to focus on investment opportunities where competition is limited or nonexistent.” (It’s possible antitrust regulators are taking them at their word: On Thursday Bloomberg broke the news that the Justice Department is probing Apollo’s financing of a buyout of 64 TV stations under the suspicion that it is conspiring to jack up cable TV fees.)
In focusing their investigatory efforts on the cash-mining activities of private equity firms, the antitrust originalists are directly attacking a major driver of the cost-of-living crisis that 17 percent of Americans say is the most important problem plaguing the nation today. And yet somewhat depressingly, nobody is attempting to politically capitalize on this moment. Bob Ferguson, the Washington state AG who filed the lawsuit that got the $4 billion cash grab suspended, isn’t up for re-election until 2024. Karl Racine, the D.C. AG who took the lead on the accompanying federal lawsuit, is sitting out 2022 after two terms; Lawrence Wasden and Mark Brnovich, the Republican attorneys general of Idaho and Arizona who joined Ferguson and Racine in a letter to Cerberus objecting to its dividend last month, are also leaving office, both after losing primaries over the summer to Trumpers. I guess Americans should take heart that at least three powerful lame-duck law enforcement officials probably won’t be decamping for private equity jobs when their terms end in January. But now that they have laid the groundwork for a genuine crackdown on the corporate crime wave that got us into this morass, I’d like to dream even bigger, of a world where people who work for a large national supermarket chain can afford to shop there again.