Could The Kroger Co. (KR stock) buyout of Albertson's (ACI stock) lead to a dividend cut?

UPDATE: The Kroger Co. is now stating that its offer for Albertson's is for $34.10 a share. This implies a $24.6 billion enterprise value and would have Kroger take on Albertson's $4.7 billion in debt. ACI stock jumped 4.9% on the news to $30. Albertson's would also pay out a $4 billion dividend on November 7. Kroger Co. shares dropped further in Friday's premarket on the news as shareholders weigh the enormous merger that would create a grocery giant with nearly 5,000 stores, 4,000 pharmacies and 2,000 gas stations.

The Kroger Co.'s (KR) attempted acquisition of competitor Albertson's (ACI) is already yielding the expected outcome. KR stock has shed 1.2% in Friday's premarket, while ACI has shed 2.7% after its furious 11.5% rise following the news on Thursday. While the news is exciting, the market is beginning to scrutinize the deal the morning after. Unofficial hearsay from a Bloomberg article suggests that the cash plus stock deal may figure in around $25 billion. This appears fairly large as ACI had a market cap of $13.6 billion at the close on Wednesday.

Moreover, the market is questioning whether Albertson's acquisition would weigh down Kroger Co.'s dividend growth, the primary focus of shareholders, and whether the Federal Trade Commission (FTC) will give the go-ahead to what already is the second largest grocery chain in the United States.

Kroger/Albertson's merger

The $25 billion price tag amounts to about 3/4 of Kroger's current market cap. That is quite sizable. Normally, companies look to acquire competitors that are less than half as big as themselves in order to make the operation digestible. The $25 billion headline price would equate to a $47 share value. This would seem to be a very attractive price for Albertson's shareholders as even during the covid euphoria when share prices spiked in late 2021, ACI stock reached an all-time high of $37.99. That puts Kroger's bid at a 23.7% premium to its all-time high and a good 40%-plus premium above its recent trading range.

Probably more important is that Alberton's and Kroger's stores overlap in certain regions. While Albertson's has approximately 387 locations largely to the west of the Mississippi River, Kroger is the second largest grocery chain in the US and owns a number of smaller retail chains from coast to coast. Kroger has about 10% of the US grocery market share, while Walmart has about 21%. Certain markets like California, Idaho, Montana, Nevada, and Texas where Alberton's has the majority of its stores might make the FTC blink twice since Kroger is already a major competitor in those markets. Traders have to ask themselves if the FTC would allow a merger like this during a time when food inflation is already a major political issue. 

List of The Kroger Co. stores throughout the US

Albertson's is already the fourth-largest grocery chain in the country, so the likelihood that the FTC would demand asset sales in certain key markets is almost certain. 

“This is the type of transaction that really looks good on paper, but the actual practicality of achieving regulatory approval by the FTC could be difficult,” said Bloomberg Intelligence analyst Jennifer Bartashus. “If you think about the store bases of the two respective entities, there is a lot of overlap in very competitive markets.”

The second issue is the dividend. Kroger has long been a favorite of dividend growth investors on Wall Street. KR stock currently avails a 2.3% dividend, but this hides the fact that its dividend growth rate over the past five years can be annualized at 16.7%. That figure is well above the norm and has made Kroger a quite popular stock in recent years. The heavy dilution coming from this merger would almost definitely put a stop to that growth rate. At last look, Kroger Co. already has $20.4 billion in total debt on its balance sheet, although it should be noted that the company has net debt closer to $10 billion.

Kroger/Albertson's stock forecasts

KR stock is now stuck between the 20-day and 50-day moving averages, which have been in a bearish position relative to each other. Bulls are going to want to see a close above the 50-day in order to get excited. The 50-day moving average is currently at $47.19. Above there is the September swing high at $52 that should provide resistance, as well as the $53.35 level from May and June. Support can be found at $43.

KR daily stock chart

ACI seems like the much better risk/reward play here. If the deal does not go through, ACI stock could likely trend back to support at $24.50 – a 14.4% loss. If the deal goes through, however, then buyers at yesterday's close stand to make 64.2%. That is quite the difference.