Mega dividends under suspicion

Wall Street

Ricardo Jiménez (Harmon) | Albertsons is the second largest food supermarket chain in the United States, by number of shops. The company has more than 2,200 outlets, employing nearly 300,000 people. Its sales exceed $75 billion. 

In October 2022 it received a takeover offer from Kroger, the largest chain in the country, for a sum of close to twenty-five billion dollars. The merger of the two companies will create the dominant group in the US food sector with more than 5,000 shops. 

The merger should be just one of a series of mergers that are taking place all the time. However, the creation of market-dominating groups in any business activity is encountering growing opposition from the political establishment and increased scrutiny by antitrust authorities. The merger of the two companies would lead them to dominate more than 70% of the north American market.

Albertsons announced mid-year that it was engaged in a strategic review of alternatives for the company, with a view to strengthening its balance sheet and developing its business. As a result of this analysis, the company announced in October a mega-dividend of $4 billion, payable in the first week of November. In terms of dividend per share, this is $8.65, which is 72 times the company’s usual dividend.

This has attracted the attention of the authorities and, in an unusual move, the Washington State Attorney General asked the courts not to allow the payment, pending a review of the merger.

The prosecutor, who was later joined by prosecutors in California and Illinois, argued that such a dividend would significantly weaken the company, diminish its ability to compete and invest, and put jobs at risk. The judge initially blocked the payment, which has led to an ongoing legal battle on the part of the company.

Albertsons, in its communications to the stock exchange authority, has strongly protested, denying the prosecutor’s claims, and defending that the agreement was taken unanimously by the company’s Board of Directors. The company defends the existence of credit lines that guarantee future investment capacity. Albertsons is listed on the stock exchange, with a value of about 11 billion dollars. The share price has fallen by about 20% since the announcement of the possible dividend.

The controversy over the payout is fueled by the fact that Albertsons´ largest shareholder is Cerberus, a private equity fund with more than $60 billion under management.

Cerberus, which bought the company in 2006, listed it in 2020 but remains its core shareholder. In the last two years the company has had strong growth in sales and results, so it seems a good time to continue divesting the company, previously taking as much cash as possible via dividends.

The company has gross bank debt of $7 billion and cash of more than $3 billion, which would disappear with the payment of the dividend. Like all distribution companies, which collect cash from their customers and pay their suppliers in instalments, the company has debts to suppliers of another $4 billion. Its double indebtedness, bank and operational, would be close to $11,000 million, compared to an operating result of $4,000 million, which leaves it very weak in the face of any crisis.

Indebting companies to take out a mega-dividend with which to recover the investment and obtain a high return is the road book of all private equity investors. These are called dividend recapitalization dividends.

The operational improvements and tight cost controls implemented by private equity firms often allow them to increase cash flows with which to pay off these debts taken to the limit. In those years of debt repayment, it is normal for the private equity fund to no longer be present in the company’s shareholding, but to look for other opportunities to repeat the scheme.

The controversy is being played out at a time of increased government scrutiny of this type of operations. It is estimated by Bloomberg that private equity funds in 2021 indebted more than $80 billion euros to companies to be able to pay themselves dividends. 

The case of Cerberus is particularly sensitive given that the fund was the main shareholder of the car manufacturer Chrysler, which had to be rescued by the US government. Another case of bankruptcy of companies whose main shareholder was a private equity fund was Toys ‘R’ Us, which went bankrupt, with the loss of thousands of jobs, after multiplying its indebtedness twenty-fold.

From an investor relations communication point of view, the case presents a point of debate on short-term versus long-term management. All shareholders benefit today from the mega dividend. In the long term the financial position of the company is severely weakened. The availability of credit lines, which are likely to increase in cost, automatically increases the company’s debt in case of being used for any purpose.

Another relevant aspect of the Albertsons case is the question of whether what we might call “a new feudalism” is developing. A scenario, as we have seen in Europe with the new taxes on the so-called “extraordinary profits” of banks and energy companies, in which the authorities can afford to intervene directly in business decisions taken by managers and shareholders of listed companies.

After several months of judicial battle, the judge repeatedly dismissed the prosecutor’s requests, opting, as usual, for free enterprise and not for feudalism. Albertsons approved yesterday the immediate payment of the special dividend in question.

About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.