MDC Financial Research's Michael Cohen provides his post-game report on $ACI / $KR case

Episode Summary

Executive Summary: The episode analyzes the Kroger-Albertsons FTC preliminary injunction trial with courtroom observer Mike Cohen. The discussion centers on market definition, labor-market claims, divestiture buyer CNS, and whether local harm in places like Santa Fe outweighs broader national benefits. Cohen thinks defendants made stronger arguments than expected, but still sees a 70-80% chance of an injunction, with the deal potentially restructured and revived later.

Main Topics: Overall read on the Kroger-Albertsons trial (Priority: 5/5): Cohen says plaintiffs started strong, but defendant arguments improved over time. He ultimately believes the merger should close eventually, yet expects Judge Nelson to likely grant a preliminary injunction first. Market definition and the 'splat vs circle' debate (Priority: 5/5): A major issue was whether the relevant market is the traditional supermarket, a broader supermarket set including Walmart/Costco, or a local overlap shape. Cohen thought the plaintiff expert's broader framing helped defendants by acknowledging substitution across many formats. Santa Fe as the key presumptive market (Priority: 5/5): The most important local overlap appears to be Santa Fe, New Mexico, where both experts saw a presumptive market. Cohen thinks the nationwide benefits don't solve that local problem, and that the judge may block based on that market alone. Labor-market theory as a sideshow (Priority: 3/5): The labor-prong argument, focused on collective bargaining markets, was largely dismissed by Cohen as weak and unlikely to be the basis for an injunction. CNS as divestiture buyer (Priority: 4/5): Early testimony made CNS look weak because of past divestiture failures and alleged misstatements, but later evidence, especially the detailed 'walnut business plan' and Albertsons management support, made Cohen more confident CNS could run the assets competently. Expert witness battle: Dr. Hill vs. Dr. Israel (Priority: 4/5): Cohen viewed Dr. Hill as polished but vulnerable on cross, especially on cost treatment and market shape assumptions. Dr. Israel, though less academic in style, appeared more practical and bulletproof under cross-examination. Procedural and remedy implications (Priority: 4/5): The case includes related state actions, an existing Colorado injunction, and an outside date pressure point. Cohen believes even if the FTC wins a PI, the parties may restructure divestitures and keep working toward a closing or later settlement.

Key Arguments: The plaintiff’s early pricing evidence made Kroger and Albertsons look like direct competitors pricing off each other. The plaintiff’s own economist broadened the market beyond traditional supermarkets, which weakened the FTC’s original narrow-market theory and helped the defense. Labor-market allegations were not convincing because the relevant collective-bargaining markets were inconsistent and geographically uneven. CNS initially looked like a bad divestiture buyer due to prior failures and alleged misrepresentations, but later evidence suggested it had a serious retail plan and meaningful management investment. The local overlap problem is concentrated in a few places, especially Santa Fe, while the broader merger case relies on nationwide efficiencies and competitive benefits. Judge Nelson gave few clues during the hearing, making the outcome hard to read from courtroom behavior. A preliminary injunction would not necessarily kill the deal; it could force more divestitures or a later settlement/restructuring. The defense’s closing was less effective than expected, while the FTC’s was more organized and concise. Even if a PI is issued, the parties have strong incentives to continue negotiating because of sunk costs, breakup fees, and strategic fit against Walmart.

Data Points: Trial length: 14 days - Length of the preliminary injunction hearing discussed throughout the episode Outside date: October 9 - Deadline mentioned for the deal, with state proceedings potentially pushing past it Colorado trial end date: October 18 - State case timing referenced as part of closing risk Earliest possible close after Colorado case: October 23 - Derived from a five-day gap after the Colorado trial end date Divestiture stores originally promised: 485 - Number of stores initially discussed for divestiture Divestiture stores later increased to: 559 - Number of divestiture stores after an expanded package CNS deal value: $2.9 billion - Purchase price for the divestiture assets by CNS Real estate component of CNS purchase: about $2 billion - Cohen said much of the $2.9 billion could be tied to real estate value Albertsons share price mentioned: $18 per share - Used to discuss market skepticism versus potential deal upside Merger payout if closed: $27.25 per share post special dividend - Referenced as the expected Albertsons payout if the deal completes Possible breakup fee: $600 million - Mentioned as the fee if the deal breaks and parties walk away CNS buyer economics: losing about $1 million a year - Claim made about divestiture store performance when wholesale is included Private-label water example: 31+ stores - FTC counsel’s Kirkland water was said to be closer than 31 other stores, used to illustrate market definition

Pivotal Quotes: "I think that the Judge Nelson is going to issue a preliminary injunction here, but I don't think that necessarily is the end of the story." — Mike Cohen: His overall forecast for the case outcome "He thought it was a splat. This amorphous shape that might go longer along highways where there's Costco or Walmart down that highway." — Mike Cohen: His explanation of Dr. Israel’s broader, more realistic market definition "The whole divestitures as designed for litigation and not commercial success." — Andrew Walker quoting the state closing argument: How the FTC characterized the proposed divestiture package

Implications: Listeners should expect a likely preliminary injunction, but not necessarily a dead deal. The real battleground is whether the parties can reshape divestitures enough to satisfy local competition concerns while preserving broader strategic value.