What the Kroger-Albertsons Deal Teaches Us About “Hell or High Water” Clauses

The recently blocked Kroger-Albertsons deal, a $24.6 billion merger that would have created a massive grocery store operator, provides valuable lessons about how to handle antitrust risks in M&A agreements. More specifically, it highlights the significance of “hell or high water” clauses that require the parties to take whatever steps are necessary to remove antitrust impediments, including divesting assets. Albertsons has claimed that Kroger violated these provisions of the deal. 

In October 2022, Kroger and Albertsons publicly announced their merger. Kroger was the largest traditional grocery store chain in the United States. It had 2,700 stores across 35 states and Washington DC. Albertsons was the second largest supermarket chain in the United States with 2,269 stores in 34 states and Washington DC.

Ultimately, the Federal Trade Commission and various states filed suits in both federal and state courts to block the merger. The federal court issued its ruling on December 10, 2024 granting the FTC’s motion to enjoin the merger. Shortly thereafter on the same day, the Washington state court also enjoined the merger. The next day, Albertsons withdrew from the merger and filed suit in Delaware Court of Chancery alleging that Kroger breached the merger agreement.  Albertsons seeks billions of dollars in damages.

Negotiations Anticipated Divestments

Prior to the public announcement of the merger, the parties negotiated a merger agreement.  Albertsons alleges it knew from the start there would be potential antitrust concerns, and a “robust” divestiture of stores would be required. Consequently, Albertsons alleges it wanted to ensure Kroger would be obligated to take all steps necessary to obtain government approval.  Albertsons sought language in the merger agreement that Kroger would be obligated to use its “best efforts to take . . . any and all actions necessary to avoid, eliminate, and resolve any impediments under the Antitrust Law . . ..” 

As the complaint alleges, under this provision, “Kroger was agreeing to remove antitrust impediments ‘come hell or high water.’” The parties also negotiated a “break fee” of $600 million if the agreement was terminated for various reasons. In addition, the agreement contained a provision permitting “benefit of the bargain” damages for a “Willful Breach” of the merger agreement.  

The complaint also alleges the parties negotiated a cap of 650 stores Kroger would have to divest.  But Albertsons contends there was no cap on the non-store assets that could be transferred in a divestiture, such as “banners” or store brands, private labels, IT and data assets, distribution assets and manufacturing centers.

The Importance of Meeting with Antitrust Authorities

It is standard practice for merging parties to meet early and often with the antitrust agency responsible for the case and present their arguments for the merger and a divestiture package if appropriate. Indeed, in a $17 billion merger in which I was involved, we made a presentation to the Department of Justice before the Department of Justice and the FTC had determined what agency would handle the merger.  (We guessed correctly because the DOJ ultimately handled the matter).  We also presented at that time a divestiture package designed to satisfy the government’s antitrust concerns.  This divestiture package ultimately resulted in a consent decree.

Albertsons alleges Kroger ignored the analysis of their experts as to the store divestitures necessary to pass antitrust scrutiny and instead cherry-picked stores because of their poor financial performance.  And throughout the process, Kroger refused to divest enough stores to eliminate the presumption of anticompetitive effects in several markets. Indeed, the complaint noted Kroger’s economist was forced to concede at trial that nearly two dozen markets would have presumptively anticompetitive effects even accounting for the divestiture. Such an admission by itself was sufficient to torpedo the merger.

More Problems with Kroger’s Planned Divestments

Both Albertsons and the FTC also condemned Kroger’s selection of C&S Wholesale Grocers as the buyer of the divested stores. Both parties asserted C&S had experience mainly as a wholesaler and its limited retail experience had been unsuccessful. Indeed, Albertsons noted in its complaint that Kroger passed up another buyer who Kroger’s own executives found superior.  Furthermore, both Albertsons and the FTC argued C&S had not been provided the non-store assets necessary to compete, including recognized store brands, private labels, distribution infrastructure and IT.

Ultimately, the federal district court in Oregon and the state court in Washington agreed with these assertions, leading to the injunctions. 

Kroger has issued statements arguing that Albertson’s complaint is meritless. Ultimately, which version of the Kroger-Albertsons deal will prevail is currently in the hands of a Delaware judge. However, the trial of these issues will provide valuable lessons in the risks and rewards of “hell or high water” clauses as well as the process necessary to convince an antitrust regulator to approve a deal.

Important takeaways about antitrust risks in M&A agreements:

• Clear and comprehensive antitrust provisions are essential: Merger agreements should clearly set forth provisions for antitrust risk. These might include “hell or high water” provisions, which obligate the parties to take all necessary actions to resolve regulatory issues.
• Divestitures, if required, must be meaningful for antitrust approval: Divestitures must be designed to eliminate competitive harm and satisfy antitrust regulators. Simply divesting underperforming stores or selecting weak buyers will not be sufficient.
• Buyer selection in divestitures matters: The chosen buyer must have the capability to effectively operate the divested assets to restore competition. Selling to an underqualified buyer can lead to regulatory pushback and deal failure.
• Proactive engagement with regulators is key: Early and frequent communication with antitrust authorities is critical. Parties should proactively present their case and offer solutions to address concerns.
• Legal and financial consequences of breaching the agreement: Failing to comply with merger obligations, particularly those tied to antitrust concerns, can result in significant legal and financial penalties, including breach of contract claims and damages