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The Kroger-Albertsons Merger Spotlights a Popular Private Equity Tactic

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At a time when corporate consolidation has turn out to be a significant concern in Washington, D.C., the proposed deal has already drawn a terrific deal of pushback. At a hearing on the merger held by the Senate antitrust subcommittee a couple of weeks ago, Amy Klobuchar, a Minnesota Democrat who leads the subcommittee, suggested that the merger would lessen competition and result in price hikes. And Senator Mike Lee, Republican of Utah, complained that for all of their guarantees that the deal can be good for everybody, the 2 corporations hadn’t explained “why the merger is mandatory in the primary place.”

But there may be one other aspect to this deal which may be much more contentious.

Albertsons, which Cerberus bought for $350 million in 2006, is planning to pay a $4 billion dividend to its investors — and to do it now, greater than a yr before the merger closes. Although Albertsons became a public company in 2020, Cerberus stays its largest shareholder, with a 30 percent stake. It also controls the Albertsons board. (Cerberus didn’t reply to an email requesting an interview.)

“In my view, the $4 billion special dividend is simple corporate raiding,” Sarah Miller, the founding father of the American Economic Liberties Project, wrote in an email. Karl Racine, the attorney general of Washington, D.C., noting that the dividend was 57 times as much as any previous Albertsons’s dividend, called it “a money grab.” He and others also identified that Albertsons didn’t have $4 billion in hand; it might should borrow $1.5 billion, adding to its nearly $7.5 billion debt load.

Dividend recapitalizations — or dividend recaps, as they’re called — have turn out to be a reasonably common trick within the private equity playbook. Last yr, in response to a Bloomberg report, corporations borrowed around $80 billion — a record — to pay out dividends to their private equity owners. Critics say that dividend recaps too often leave corporations without enough capital to face up to a business downturn. For personal equity firms, said Andrew Park, a policy analyst at Americans for Financial Reform, “it’s heads I win, tails you lose.”

Dividend recaps are frequently under the radar, as private corporations should not required to make the identical level of monetary disclosure as public corporations. The Albertsons recap, nevertheless, was right there within the merger documents — and critics quickly pointed to it as a classic example of how private equity firms maintain themselves ahead of the businesses they own.

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