Published on Nov 13, 2023
Kroger (KR) and Albertsons’ (ACI) attempt to win regulatory approval for their $24.6 billion merger by selling assets to C&S Wholesale Grocers may face a hurdle from an unusual quarter—a C&S affiliate that is beholden to the biggest U.S. supermarket player of them all, Walmart (WMT), former FTC officials said.
Privately held C&S shares a lead owner and key executives with Symbotic (SYM), a company that automates warehouses with wheeled robots that zip from rack to rack to pick out packages and stack them onto shipping pallets. Symbotic, in turn, derives almost all its revenue from Walmart, which owns about 11% of the robotics maker.
The links between the companies are sure to draw the FTC’s attention because they raise questions about how fiercely the C&S-owned stores would compete against Bentonville, Arkansas-based Walmart, three former agency officials told The Capitol Forum.
“The FTC undoubtedly will look at the relationship here between Symbotic and Walmart and attempt to assess whether there will be an incentive for the proposed divestiture buyer to be less aggressive at the retail level in order to protect that relationship,” said Bill Baer, a former director of the FTC’s Bureau of Competition and DOJ antitrust chief in President Barak Obama’s second term. “That is a perfectly predictable and legitimate part of the FTC inquiry.”
The agency is widely expected to challenge the transaction rather than settling for the proposed fix, which has raised questions about whether wholesaler C&S has enough experience to run more than 400 retail stores, especially in challenging environments such as Alaska. The Walmart connection is likely to deepen concerns about the proposed divestiture, former agency officials said.
Current FTC leaders are reluctant to accept a remedy “unless they’re relatively sure that it’s going to work, and this is complex and uncertain,” said Joseph Miller, a former attorney in the Bureau of Competition and former assistant chief of the health care and consumer products section of DOJ’s Antitrust Division.
“The FTC has said over and over for years and years that they’re looking for clean divestitures, and this is not clean,” said Miller, who now co-chairs the antitrust practice at the law firm Mintz. “This is complicated. It’s very fact-dependent and specific, but it’s just yet another entanglement and reason to think that this is much more complex than the FTC would want for an effective remedy.”
What’s clear is that Rick Cohen, the billionaire chairman and third-generation owner of Keene, New Hampshire-based C&S, is also the founder, chief executive, chairman and majority owner of Symbotic through a complicated set of family holdings in various classes of shares. What’s less clear is how—or even if—Symbotic’s ties to Walmart would affect C&S decisions in the retail grocery marketplace.
The divestiture plan announced in September said C&S had agreed to buy 413 stores, eight distribution centers, two offices and five private-label brands across 17 states and the District of Columbia. The release didn’t disclose the exact locations of the stores, but the willingness of C&S to pay $1.9 billion in cash for those assets suggests that Symbotic’s dependence on Walmart hasn’t stopped the wholesaler from trying to expand its retail base beyond its relatively small footprint today in New York, Vermont and some corporate-owned Piggly Wiggly stores. If C&S wanted to steer clear of competition with Walmart, the company might argue, why would it buy hundreds of retail stores, many of which currently compete with Walmart, in the first place?
The agency could look for evidence that Symbotic’s relationship with Walmart has affected the wholesaler’s activities, though this would be hard to prove without internal documents showing that C&S executives made decisions based on how Walmart might perceive them, said Jack Kirkwood, a professor at the Seattle University School of Law and former FTC official. Agency attorneys could also look for ways that Walmart might be poised to punish Symbotic in response to fierce competition from C&S, he said.
“You could see them arguing that this relationship with Symbotic” raises questions about the effectiveness of the divestitures, Kirkwood said. “You could easily see them making that point. But the merging parties could then come back and say, ‘But there’s no evidence that this is a significant problem.’”
Spokespeople for C&S, Symbotic, Kroger and Walmart didn’t respond to requests for comment. The FTC and Albertsons declined to comment.
Walmart’s relevance. Competition with Walmart is a motivating force for the pending deal. Kroger CEO Rodney McMullen and company spokespeople routinely pitch the merger as a means of better counterbalancing Walmart’s dominance. Research firm Numerator recently put Walmart’s share of the U.S. grocery market at 25.2%, making it larger than the next two biggest rivals combined – Kroger with 10.7% and Costco with 9.9%. Albertsons had 7.2%.
FTC attorneys probably began factoring Walmart into their analysis of the deal long before Kroger and Albertsons unveiled their divestiture plan. In past reviews, the agency included Walmart Supercenters when it measured how local competition might be affected by other grocery mergers—including Albertsons’ 2015 acquisition of Safeway, Ahold’s 2016 purchase of Delhaize and the 2021 merger of Tops Markets with Price Chopper. Supercenters constituted 3,560 of Walmart’s 4,616 retail locations in the U.S. as of July 31, according to the company’s website.
Walmart is Symbotic’s largest customer by a long shot. Walmart accounted for about 94% of its revenue in the fiscal year ended September 24, 2022, Symbotic reported in its latest annual 10-K financial filing. That was up from around 67% a year earlier. The share remains high, judging from the warehouse-automation company’s latest quarterly financial filing, which said that an unnamed “Customer A,” presumably Walmart, accounted for 87.3% of Symbotic’s revenue in the nine months ending June 24, 2023.
Under a Master Automation Agreement struck with Walmart in 2017, Symbotic agreed to install systems in 25 of Walmart’s 42 regional distribution centers, according to the “Risk Factors” section of the company’s latest 10-K.
“The loss or cancellation of business from Walmart, including our failure to properly implement or optimize our warehouse automation systems in Walmart’s distribution centers, or our failure to comply with the terms of the Walmart MAA, could materially and adversely affect our business, financial condition or results of operations,” the filing said.
Symbotic said it might also face a setback if Walmart’s business were to decline as a result of “competition from other retailers.”
The companies later expanded the partnership to cover all 42 distribution centers.
Going public. Symbotic went public in 2022 via a merger with a special purpose acquisition company (SPAC) sponsored by an affiliate of SoftBank (TSE: 9434). SoftBank has been reported to own as much as 8% of the robotics company following the creation of a new joint venture with Symbotic this year.
The SPAC transaction got a boost from Walmart via a $150 million private investment in public equity (PIPE)—a form of private capital raising often used in such deals. In addition, Symbotic issued warrants to Walmart, giving the retailer the right to buy additional shares in Symbotic for a set price in the future, according to multiple financial disclosures.
In a July securities registration filing, Symbotic reported that “Walmart Inc. owns 10.9% of the outstanding shares of common stock of Symbotic Inc. and therefore may be considered an affiliate of Symbotic Inc.”
Walmart has also obtained “certain board observation rights” at Symbotic, the company said in its annual report. “Thus, our ability to maintain a close, mutually beneficial relationship with Walmart is an important element in our continued growth,” it said.
Among other significant Symbotic shareholders, the securities registration lists 18 C&S executives—including its chief executive, chief financial officer and other top officials handling procurement, human resources and information.
But the top three owners are clearly Cohen, Softbank and Walmart. During Symbotic’s first-quarter earnings call in January, an analyst asked about the liquidity of the company’s shares and whether there were “things you can do to address that.”
Cohen responded by saying he was “not hung up on owning—between me and SoftBank and Walmart—having just three people on [sic] such a large percentage of the shares.” But he acknowledged that the situation wasn’t “optimal.”
“We’d like, when the time is right, to have large investors own more of the shares,” he said.
Restrictions on C&S. A 2019 version of the Master Automation Agreement (MAA) between Symbotic and Walmart said that “certain obligations of Symbotic under this Agreement may be fulfilled by C&S.”
The MAA also mandated that certain Symbotic employees must notify Walmart in writing should they learn that either C&S or Cohen was exploring plans for a potential sale of a substantial stake in Symbotic or had received an offer to buy the tech company.
As part of the agreement, Symbotic also accepted what its annual report called “restrictions on our ability to sell or license our products and services to a specified company or its subsidiaries, affiliates or dedicated service providers.”
The filing doesn’t identify the company in question and a Symbotic spokesperson didn’t respond to questions about the subject.
Albertsons as a customer. In addition to Walmart, Symbotic has said that it depends on sales to C&S, Albertsons, Giant Tiger and Target. But that dependence accounted for only some 6% of total revenue for the year ended September 24, 2022, said the 10-K filing, which also mentioned work that Symbotic was doing for United Natural Foods (UNFI), a wholesale specialty foods distributor.
In an October 25 presentation to investors, Symbotic said that its work for Albertsons included two distribution centers. One slide shown during the talk said that part of the company’s long-term growth strategy was to “increase existing customer penetration.” The slide then listed three customers: C&S, Albertsons and Walmart.
