Yet Another Value Podcast - MDC Financial Research's Michael Cohen provides his halftime report on $ACI / $KR case

Episode Date: September 5, 2024

Michael D. Cohen, CEO & Director of Research at MDC Financial Research, LLC, joins the podcast to provide his halftime report on the Albertson's / Kroger's merger case. For more information about MDC Financial Research, please visit: https://mdcfinancial.com/ Chapters: [0:00] Introduction + Episode sponsor: Ycharts [2:02] Overview of the $ACI / $KR case thus far (high level halftime report) [5:35] Anything Michael seeing in the courtroom that you wouldn't be able to pick up unless you're there [9:00] Market definition [12:58] Pricing argument [23:34] Divestiture [32:00] Eric Winn's testimony [36:57] C&S lack of data scientists, what does this mean [42:04] How does the fear this will be "Haggen 2.0" frame this discussion [45:58] Labor argument [50:10] Politics entering the case? [51:50] How this merger not going through could be bad for consumers [55:15] Final thoughts or anything missed from the trial thus far [57:36] Odds right now for the merger approved / dismissed Today's sponsor: Ycharts This episode is sponsored by our friends at YCharts. A typical day in the life of a financial advisor calls for back-to-back client meetings, juggling portfolio management, and the consistent desire to improve client relationships. YCharts’ report and proposal tools could be the missing piece to help you effectively handle these time-consuming tasks. Now more than ever, clients want to hear from their advisors. And with user-friendly templates at your disposal, generating impactful client reports can be easily integrated into your everyday routine, helping you free up time and focus on what matters most: enhancing client interactions and growing AUM. Click here to start your free YCharts trial and level up your game with YCharts: https://go.ycharts.com/yet-another-value

This episode is sponsored by our friends at Ycharts. With all the various job functions that advisors are tasked with, your time is extremely valuable and often scarce. Ycharts is a platform centered around efficiency and built with speed and mine. With an intuitive and user-friendly interface, Ycharts help save advisors 29 hours per month while uncovering better and new investment ideas. Need a way to help clients visualize their financial future, reinforce the importance of consistent investing, and guide them toward informed decisions.

Tools for scenario building, portfolio construction, and proposal generation can be the missing piece to your service. So you can act on an idea right when the light ball flicks on. If you're watching this, if you're watching this podcast on YouTube, or you read any of the blogs, you'll see we start every YouTube with the Y charts of the stock price that we're talking about on it. Or on the blog, I insert lots of Y charts into the blog. And there's this reason. It's fast, it's simple. And the charts look really good without taking a lot of time. I can get these charts into the videos and into the blogs and worry about writing, making podcasts, doing other stuff. So, look, if you're interested in Y Charts, click the link in the show notes to get 15% off your initial YCharts professional subscription when you start your free YChart trial and tell them I send you.

All right. Hello, and welcome to see yet another value podcast. I'm your host, Andrew Walker. If you like this podcast, I mean, a lot of you could rate, subscribe, review, wherever you're watching or listening to it. With me today, I'm happy to have on the only man who could get me to record on the Sunday before Labor Day, the founder of NBC Financial. Mike, Mike, how's it going? It's going good, and it's great to be here again. and I really appreciate you being able to accommodate my Sunday because I've been commuting via

car to Portland, Oregon from Northern California. And this is really the only day I can do it outside of doing it from a hotel room. Look, it's a great, it's a great reason. I know people are going to be excited to have you back. But before we hop into the reason we're recording on a Sunday and everything, let me just remind everyone, nothing on this podcast is investing advice. That's always true. But we're going to be talking about a legal case here. I know neither Mike nor myself are lawyers, so, you know, not investing advice, not legal advice, not any type of advice. Please do your own work, consults financial advisor. Mike, the reason we're having you on, the reason you're commuting, the reason we're talking on a Sunday is Albertsons

and Kroger's are merging, are attempting to merge. The FTC is we need to block them. You know, you run NBC Financial. I think it's a must have if you're any type of investor filing legal situations. You guys are just blasting out emails all the time. But the reason that you're traveling to Portland is you're going to the trial in person for 14 days. So kind of similar to what we were doing with JetBlue and Spirit. This is our halftime report. The first five days, the opening statements, some of the plaintiff's witnesses have testified. We're going to do a halftime report. And then I think we're going to do a follow-up full-time report when the trial wraps up in about two weeks from now. So this is our halftime report. I guess I'll

just start. You know, if I just backed up and people can go listen in December. I had an econometrics on Brian Albrecht, who we talked about the economic case for Kroger and Alberts and marketing. I guess I'll just start, you know, as you and I sit here, half time of the merger, if I had to say, hey, what's the score going into halftime? How would you kind of lay out how the case and the score is going so far? Okay. Well, we have only seen the plaintiff's case, and we haven't even seen the full plaintiff's case. So the only idea really we get from the defendants is how they've done on cross-examination. Just to be clear, defendants is Albertsons and Kroger's, plaintiffs is the FTC, just so everybody knows what's on.

And there's several states, attorneys generals. So sometimes you hear the state of Oregon will call. I believe the state of Washington, state of Colorado, you know, at a minimum in the audience, if they're not, you know, out there at the plaintiff's counsel. But the state of Oregon has been active along with the FTC and calling witnesses. So we should really just think of it as, you know, the government, both state and federal, trying to block this deal. two very, very large, you know, traditional supermarket chains trying to merge. When I see the map of where Krogerts and Albertsons is, everything on the east is perfectly complimentary. They really don't overlap in many areas at all but for maybe Chicago, a little bit in the Dakotas.

It really gets messy, though, when you get like one state west of the Mississippi and west of there. and that's where you start to get a lot of overlay. And so I think the divestriatures is going to really play a big part in this murder. Perfect. I want to dive into a lot of those things, but I guess I'll just start with one other question. You know, a lot of us, I mean, I'm locked in my apartment in New York City all the time or my office a few blocks away. You know, a lot of people dialed in. I think people were laughing at how many people dialed into, because, oh,

opening and closing statements are available by phone and then everything else you have to go in person. I think there's a correction to that. Somebody somebody did something wrong on the opening. I think they recorded something. And I believe the closing is now not going to be publicly distributed anymore. Oh, interesting. Well, on the opening, if I remember correctly, Arbs were laughing because they were like, oh, this is like going to set a record for most people who've ever dialed into one of these hearings by some multiple.

But I just want to ask, you've been in the courtroom. And one of the things that I've always found interesting is especially when I call you, I can be like, hey, you know, what are you reading the body language? And sometimes you be like, oh, the judge seemed very relaxed or, you know, the plaintiff seemed very, when they heard that, you could almost see them wince when they heard that. Is there anything that's happened in the courtroom that you think somebody who's just kind of, you know, writers has published several articles on this, somebody who's just reading the articles might not be missing or that you might think is, you know, you're kind of seeing because

you're there. There may be body language from witnesses and counsel it, but this judge has really given us no body language. She seems to have an inner bliss, and she just warmly and lovingly smiles at everybody, both sides. And I've seen absolutely nothing from her that really give you a read on what she's thinking of anybody. Even through testimony where people in the gallery are cringing, the judge, you know, is really just a rock up there. She doesn't, she doesn't alter her demeanor in any way based on what's happening in court. Perfect. It was really the judge I want to get to because, you know, judges are gods in their courtrooms. And I think all sides have been clear whichever way the judge rules is probably how this merger is going to happen, right?

Judge rules, no preliminary injunction, mergers happening. Judge rules preliminary injunction and stops this merger, mergers blocking. Yeah. And the parties, and I'm wondering how true this is, but the parties really make it, especially the defendants, really make it look like this preliminary injunction is the whole, you know, the whole show that if they're preliminary enjoined mergers off, if, you know, if they're not preliminary and join, they're just going to close and, you know, let the FTC do what they want to do. There's a new suit in Cincinnati where the defendants are actually, you know, suing the

Federal Trade Commission on constitutional issues. So this seems to be the most important thing in terms of the merger happening or not. I think the most critical, go ahead, go ahead. I was going to say it's a three-week hearing, which is pretty long for preliminary injunction. So it's really an evidentiary hearing more than a trial. It's scheduled to be 14 days long, and we've now done the first five days. So I think a lot of the preliminary junction is going to rule, and I think a lot of the juicy stuff comes out on the divesture buyer and how people think about CNS is the divesture buyer. I want to put the divesture buyer aside for a second, because one of the things that initially attracted me to this case is the fight over market definition. I think you've really seen that

so far, right? Like, Kroger and Albertsons want the market definition to be very. wide. And you've seen them play this. They've said, hey, Walmart, Target, Costco, to say nothing of several others. They are all, not only our competitors, but I think somebody from Albertsons even testified, like Walmart and Costco are the people who keep me up at night, not the Kroger across the street. And the FTC has been wanting to say, hey, the market definition is grocery stores. There was a quote from the FTC, I believe it said, where they said, you can't buy one avocado at a club store. And maybe this is the slight libertarian coming out. me like I kind of favor hey okay maybe you can't but you know people are rational they'll

they'll price fix but I wanted to ask you like the people are rational they'll go to wherever the price are lowest and whatever it's them best but I wanted to ask you you know this fight over market definition Kroger's like more expansive view versus FCs how do you think that's played on both sides there's been multiple witnesses well from the plaintiffs there were multiple witnesses talking about how do you think that's played out so far there's really been to the plaintiff's case, kind of three themes going on. And the third theme didn't really show up until day three and then the, I guess, yeah, day three and then the beginning of day four, which is labor. I'm laughing. We'll talk labor as well. Yeah. That's kind of a side show. And

it's a very entertaining side show. But the three themes have been bringing on heads of merchandising and also CEOs of competitive traditional, well, competitive traditional markets, like the Raleys, but more so the merchandising is from Dollar General, from sprouts, things they're trying to differentiate from the market. And these people are testifying that, you know, we don't see the traditional supermarket is our competitor. And then they're also bringing on internal people to both Albertsons and Kroger to show that they think of themselves as competitors.

And pretty much most of this is going to the market definition, but most of the testimony so far. And the FTC kind of looks at the traditional supermarket as the one-stop shop, the one place where you can fill your whole budget. But nobody does that anymore. When I was a kid, everybody went to a traditional supermarket, and that's the only place they went. And now, Costco and Walmart make up the majority of people's food budget. And so the one-stop shop is, you know, it's still relevant. But where do you draw the boundaries?

So clearly there's more direct competition from traditional supermarket to supermarket. But the way that the defendants are trying to present it is. it's about a food dollar, you know, consumer's total food budget. And with them, you know, even convenience stores, I mean, there's some of that food budget's going everywhere. And they look at, you know, their competitors in the wide sense. There's an argument to be said for both. We've really just seen the data laid out, so it's pretty clear what the picture is. there's not much of a clue yet how the judge

is going to go on this that being said from the pricing side there was it that's how they really started it off in day one and two especially day one and both

Kroger and Albertsons where there's overlap where there's not overlap they're not price checking off each other and the East Coast looks fine but wherever there is overlap they clearly see each other I believe as the

main number one competitor with the exception of Kroger's Kroger's is really seeing Walmart and Albertsons as their competitor they're trying to compete with Walmart because they have the leading cost structure in the industry and they're trying to get as

good as Walmart in cost and compete with Walmart and so they really see the ceiling to their pricing as Albertsons and they try to stay in the range and there's a whole bunch there's been a lot of testimony on different strategies um you know the essential goods the things that people know the prices on when they shop because they buy it every week you know those are the things they're most competitive on and then other goods they have higher margins on and there's a big differentiation of strategy going on with regard to how they price different groups of goods I've learned more

more about supermarket pricing in this trial than I ever thought I'd know. It is a fascinating subject, right? Like, there's a reason that economists have field days with it because it's a, they're always responding in real time. You're always wondering like, hey, you lower the price of milk, you know, from $2, $2.90 and put that an ad all of a time you get all the split traffic in or, you know, you think about the Costco 499 rotisserie chickens and $1.25 hot dogs or whatever. You know, the reason I want to start with pricing is because, A, the FTC did, right?

Day one and most of the day two of the testimony was devoted to pricing. I think the result will hinge on the divesture, but the divesture is needed, not need, whatever your view, in part because of this pricing argument. So let me ask a few specific questions. As you said, just generally, the FTC marched a couple people out there. I think the one from Sprouts Farmer Market was probably the most notable here. And they marched a couple of people out there who, you know, Kroger's and Albertsons might say, hey, you know, we compete with Sprott's. And Sprott came out and said, you know, the old Don Draper,

I don't think about you at all. They said we don't compete with them. We don't think about them. How did you think the testimony and the cross-examination of the kind of government witnesses that said these guys who sell food are not actually competitors? How did you think that went? I thought the Sprouts witness was fairly convincing. One thing that I thought was really good for the defendants was Mr. Knapp, who's the president of Raley's. Here you have competitors. They're arguing they're not competitors, but they're clearly testifying because they don't want this merger to go through. They're going to all be in a worst place if this merger goes through. And one of the last questions from the defendants was, if this merger goes through, will you be

forced to lower your pricing? And Mr. Knapp had to answer, yes. Yes. And then, but that, and that would be good for consumers, right? And he admitted yes, and then he wanted to elaborate. And they cut them off and said, thank you. And that's how they ended on a high note. So it did kind of appear that you've got a bunch of, they clearly compete against both Kroger and Walmart. The competition isn't as direct. They do not want the deal to go through. They would feel greater pricing pressure if they did. It's really about degrees of competition. There is competition with everybody in food, but the only place you got that kind of 100 percent, you know, perfect overlap competition is traditional supermarkets, the one-stop

shop. I'll just stick with the Mr. Knopf thing, and then we'll come back to the pricing, because, you know, one thing Kroger said, and I thought just my read, what a score points with me, Kroger came out and they said in their opening statements, I think they said, when this merger is complete on day one, shoppers will be happy to find price reductions on more than 600 items. And Kroger kept trying to almost take what the FTC was saying and throw it back at them. Like, we are going to cut prices. Another place they said is that you mentioned how Kroger kind of prices between Walmart and Albertsons. Kroger said, hey, nationwide, we're 10% cheaper than Albertsons overall.

So actually the FTC should be happy that this merger. going through because this is a cheaper grocer buying a more expensive grocer. So I just want to ask that Kroger kind of taking the FTC's argument and trying to throw it back against them. How was that playing in the room to you? How did that come out through the testimony? I think you just asked really one of the most important questions because what I'm seeing is there's really two stories here. There's areas where they don't have overlap and this is a wonderful merger. It will bring down costs. And then there's areas, you know, wherever there is overlap, I as a consumer would have concern and I would want any overlap within a certain mileage divested.

We don't know the full degree of the divestiture. Most of this is under seal. We're now starting to see it come out really in the last two days through witnesses from CNS, which is the one receiving the divestitures. If I were a judge, and I'm not, I'm not a lawyer. I don't practice law or give legal advice. But if I were, or just as a consumer, I would be very happy to see this merger go through anywhere there's not overlap because clearly Kroger has the leading cost structure.

Clearly, they're the only one, I mean, I think they're motivated to do this deal to better compete with Walmart and even get a better cost structure. So everybody who shops in Albertson's brand that's not near Kroger, I believe we'll see costs and prices go down if the merger happens. And that would clearly be, you know, pro-consumer. With the pricing information I saw in the first couple days and how they vary strategically. I mean, they're watching prices daily off each other. I've never seen such a competitive industry in terms of, you know. You're a liar because we did, our last one was on airlines. And they monitor each other's pricing very clearly in airlines, too.

It was different, though, because they actually had an organization. that's complicit in broadcasting everybody's prices in real time. Here, you know, they have secret shoppers going around in everybody's stores, and there's a lot of weddroping, and there isn't a lot of outsourcing to, you know, Nielsen and others. This is a silly one, but just to further that point, I thought the FTC, it's silly, but I also think it scores points. The FTC had an example where Albertsons, in order to learn foot traffic,

intentionally priced beer below cost for the Super Bowl. to try to look. And then Fred Myers, which is one of Kroger's brands, they match that thing. So it shows you just how responsive they are at all their prices. And I mean, Fred Myers, I don't know if they kind of figured out, oh, this is going to be a loss leader or they were just like, we have to. I don't know. But, you know, when somebody sells something under their cost of goods sold and someone else matches it, it shows you like how much they're doing. Because obviously, you're not selling under your cost of goods sold for no reason when your competitor is.

So I don't know if you wanted to add anything there. sure that was actually for the very large packs of beer it was like 30 packs so the people who either are heavy drinkers are having a party and if you're having a party you're going to be buying the dip you're going to be buying everything else yeah fred meyers uh they were shocked that albertsons was willing to do it but they weren't going to let that business get away and they matched it and sold under cost this episode is sponsored by our friends at ycharts with all the various job functions that advisors are tasked with your time is extremely valuable and often scary watch charts is a platform centered around efficiency and built with speed in mind with an intuitive and user-friendly interface watch charts help save advisors 29 hours per month while uncovering better and new investment ideas need a way to help clients visualize their financial future reinforce the importance of consistent investing and guide them toward informed decisions tools for scenario building portfolio construction and proposal generation can be the missing piece to your service so you can act on an idea right when the light ball flips on If you're watching this podcast on YouTube or you read any of the blogs, you'll see

we start every YouTube with the Y charts of the stock price that we're talking about on it or on the blog, I insert lots of Y charts into the blog and there's this reason. It's fast, it's simple, and the charts look really good without taking a lot of time. I can get these charts into the videos and into the

blogs and worry about writing, making podcasts, doing other stuff. So, look, if you're interested in Y charts, click the link in the show notes to get 15% off your initial Y-charts professional subscription when you start your free Y-Chart trial and tell them I send you. One last thing. So I think all roads are leading to the divesture, and I'm going to go to the divesture in one second. But I do want to mention Kroger's had some stats where they said, hey, look, you guys are coming at us with the one-stop shop. That's outdated, right? They had some stats saying, hey, 25% of our best customers, we only get 25% of their grocery

spend. 75% goes somewhere else. They had some other stats where they said, look, people, are willing to drive further for a Walmart for a target for a Costco than they are for a Kroger. So, you know, the market definition for a Kroger Albertsons might be hypothetically three miles or a 10 minute drive or something, you know. Whereas if a Walmart's within a 20 minute drive, that actually will compete with two Kroger's because people will drive the extra 10 minutes to go to a Walmart. I just wanted to get your thoughts on that Kroger defense because it's interesting. It goes to market definition. It's going to go to the Vester at some point. How did you think that was going?

I believe it. You know, it matches my own. The majority of my spend is in Costco. And I live near Rayleigh's and Safeways and where they overlap and compete. A matter of fact, Rayleigh's, about 20 minutes up the street for me is where they began with their first store in the 30s. I use the one-stop shop as a convenience store. You know, anything that I need, you know, short term is what I go there for. My main spend is at Costco. And while Costco doesn't have all the skews, I'll adjust what I'm eating based on just what they have. And I don't think I'm unusual there. I think that the reason that Walmart and Costco is the majority of food budget at this point, and Amazon is heavily trying to compete with that, it's changing a model is away from the traditional supermarket into really people being very cost conscious and willing to buy larger amounts to get the best costs. If this merger is approved, I have been wondering since this was announced and since it was

clear the FTC was going to sue, you know, if there was some enterprising like pod shop analyst or something who would go and find out, like stake out the local Costco and see that the judge had a Costco membership. And if they did be like, I'm max long this because if you go to Costco, you're probably more likely, as you said, to buy the story that Costco will attract larger, it's a competitor. If you don't have a Costco membership, you might not be as likely. Now, you know, obviously you could still be going to Walmart or you could be Instacarting. And Instacart hasn't really come up yet. I'm sure that will in the plaintiff's arguments. But I have been wondering if there's like the Costco diligence trick. I want to go to an investor,

but please wrap it up here. Who's going to say Mr. Knapp of Ralees, the president of Ralees, admitted that his wife has Costco membership. And that she shops at Costco. I do remember that. Let's start to vesture. So from the beginning, it's been clear that there's been some divesture needed. There's been, you know, we can talk about the, just quickly, historically, I believe it was Albertsons was buying super value and they divested source to Huggins and that went bankrupt within 18 months. And that has been, it had egg all over the face of the FTC. And I think the FTC has been very skeptical of divesture since then. So here, you know, the FTC's been worried, are we improving another Huggins if we do this divester?

The divesture buyer is CNS, and there has been a lot of talk. You had a smoking gun email, or not email, transaction exchange on day four that people can pull it up. You know, other outlets reported too, but Albertson was down 5% on Friday because of what the CNS buyer was saying. So, you know, that's the reason for people going there. I've rambled. I just want to tell us over to you, what are your thoughts on how the divesture has been presented so far and how those sides are making the divester out? Well, the first witness from CNS was Mr. McGowan, who is currently the head of retail. I think when we see the big picture and we see that it's going to be Susan Morris coming in from Albertson's taking it over,

and I think she's going to be a star witness, and that's going to be probably in the defendant's case. I think it'll lessen that. But, you know, they did buy divestiture assets from Tops. They showed that what they presented to the FTC did not turn to be true. They showed that, you know, they're underperforming now. There was some internal emails, even making fun of the retail group, thinking that, you know, they can run in retail because we're a wholesale company. They did a lot during that testimony to cast doubt over CNS's ability. to do it. They made it look like they're out just for the real estate assets, which is, you know, 1.9 a billion, I believe, of a 2.9 billion deal is just real estate. That does put a floor of risk.

It initially, I think, looked fairly bad in terms of there was, his deposition testimony is under seal, so we can't see it. But when there was a, a, objection that that's not proper impeachment. The judge overruled it. So, Mike, this was in your email, and I just want to back up because I thought this was really interesting. I want to make sure. So my understanding of what you just said is the CNS expert witness, when the FTC was crossing him, they kept referring to something he said under seal in his deposition and

saying he's impeaching himself on the stand. So he's saying something different than he said in that position. and the defendants kept objecting kind of for him, right, saying, hey, he's not, basically saying he's not lying or he's not changing his story here. Like, it's the way the questions are worded. You know, if you said, is it raining outside, I might say yes right now. And 20 seconds later, I might say no, because, you know, maybe it's gone from raising to truth. I don't know. But am I kind of understanding what happened here?

Do you just want to give a little more color on what the exchange was that? You're understanding it exactly. And there were many times where the judges said that. she saw the testimony between the deposition and what he's saying now in court is consistent. And she sustained the objections. But on at least one occasion that I, you know, and I think it might have been more than one, you know, she overruled the objection, meaning she thought it was proper impeachment. Usually you only bring up a person's, everybody who, who, you know, as a witness typically was deposed before. And that's how the lawyers know what his answers

or could be. And so when he deviates from his answers in court, they bring up his deposition usually for two purposes. One is to refresh the witness as to his memory. And the other is to impeach the witness to show that he's having inconsistent testimony. And if a witness is inconsistent, then, you know, you can throw out everything they said because they're not a reliable witness. And so the fact that it appeared that he was impeached makes it look like everything he's trying to say positive. You could just kind of, you know, dismiss. And, um, and it was shown that, uh, his stores are underperforming. Uh, that what they said to the FTC at the time of the merger is not how it, it transpired. Um, there was a lot of evidence that the company in its current state is not good

at running retail. Um, there's some internal emails that make it look like they really care about their wholesale business and really don't care about retail. I think Eric wins testimony on Friday shored a lot of that up. They really gave the thesis. And I came away personally being convinced that they have a genuine strategy reason and that they actually very are into making this deal work. And with the amount of resources that are coming over, especially from Albertsons and people who would have great careers, I don't think they're going to just throw their career out the window by jumping over to CNS, unless they, you know, really believe that CNS is committed to being a very competitive retail operator from day one.

There was one point in the testimony, and I want to come back to this impeachment, but there was one point in the testimony where, A, CNS, if I remember correctly, and as you've mentioned, they said they gave the FTC what they called their walnut business plan, and they basically said we lied in it, right? We told you guys that Grand Union, which was the acquisition, was always profitable, but actually it was always unprofitable. And I was kind of like, whoa, that's weird. I want to pause on that and the impeachment because I just laid up, hey, we gave the government something we said we lied in it, which seems like a billion's plot line, right? And then B, we mentioned the impeachment a few times.

You can throw the witness out. I mean, I'm sure most of us, non-lawyers, when we hear impeachment, throw the witness out. We're thinking like good wife, law and order, SVU, whatever, you know, like big dramatic events. And it kind of seems like it. So I just want to pause there. Like you've got the line to the FTC, maybe. You've got an impeach witness. Like, was it as big a disaster as it's seeming when I say this?

Or is it, hey, these were minor things. It seems like they got their story straight. They had another witness who came and kind of cleared a lot of it up. Like, how did you read that? I would say it was a disaster and appeared to be a disaster. I think that Eric Wynn, who is the, essentially the C, of all of CNS, including the wholesale side. And he's, on his cross-examination, I feel a fair amount was shored up.

And it did look, you know, sloppy the misrepresent. I don't know if sloppy or disingenuous is the right word. But they make a lot of money on the wholesale to the markets they're buying. And so they made it look like these stores are profitable. you consider wholesale. And then they, you know, they went to two separate sources and showed the amount of loss and then the amount of profit from the wholesale. And they basically showed that they're coming up about a million years short. I believe it was per store. And yeah, didn't have a good look at the time it happened. And that was during Mr. McAllen's testimony.

You know, and look, if you're wholesale business making $10 million per store and then you're losing $1 million per store at the storefront. You could actually justify, be like, hey, nobody's going to make this store profitable, but the wholesale business is so profitable when we bundle a whole thing up together, like, it still really works for us. That's fine. Like, you could do that, right? It's a loss leader.

The store is a loss leader to your wholesale. Go ahead. I was going to say, if you think of CES or CMS, they're kind of in a better position to have a bad period or go through more transition difficulty because there's, they're going to be making it up on the wholesale. If somebody just jumped straight into this and had to do any rebranding or anything and had, you know, a difficulty, I think they'd be less likely to be able to go through that hardship.

I'm glad you mentioned that because it was actually going to be my next question, so I'll jump there. I will come back to this in one second, but Albertsons said in their, I believe it was Albertsons, not Krueger, who said in their opening statements, hey, we actually think CNS is better than either Kroger's. or Albertsons as a retail operator because they have the wholesale and they have the integration, they're way bigger than either of us. And that struck me as kind of crazy. I was like, I cannot believe they're arguing this company that's about to come out that they were running

unprofit retail stores, you know, a hundred of them. I'll mention data science in a second. I can't believe they're arguing that. But it sounds like you're saying, hey, they may have laid the groundwork. And again, this is the halftime report. We're going to hear the defendants call witness and do their testimony. But it sounds like they might be, they might be, laying the groundwork for that successfully coming being an argument is what I'm hearing I think there's a great bridge into starting to talk about Eric Wynn's testimony he was the president of CES he was he was essentially the only witness on the last day we got off at lunchtime so the whole we start at nine we got out I think it was 12 or 1230 that was all Eric Wynn uh I thought he was an excellent

witness and he I think it was the only excellent witness that was a CNS employee to date. He gave me a reason why I believe that they're committed to retail. I came away from the previous day with all kinds of suspicions. You know, they're going to cherry pick and keep half the stores and close half. they're they're doing this to broker it out to their their wholesale customers

later they're in it for the real estate a lot of the dispersions that were created the prior day were large in my mind and I feel Eric Wynn cleared a lot of that up they lost in I believe it was in 19 or sorry 2019 I think was like 44% customer.

It was a huge customer. And they start where they moved to self-distribution. And they realize that if the direction of competition for their wholesale business is more and more people might be self-distributing. And then there's clearly synergy with self-distributing. Part of my own suspicions was you don't want to compete with your customer. And customers would be really defensive about that. And there was an email where he was assuring a customer.

you know, we're not really that committed to retail. You know, our wholesale business is more important. There was asks about, can you sell them? Like, I guess he wanted to be a buyer. We can't talk about that yet. And then the testimony was that's during the, when they were talking to the FTC. So they, you know, like he didn't want to put it in email,

you know, start pricing and, you know, beginning brokering the stores out. It looked really bad. When I saw Eric treat it as that's a really good question as to the not wanting to compete, and that the very first thing he did was look at the overlap of where his customers are and the stores are. And then he saw that these are assets where I can be in regions where I don't have strong customer presence. That's exactly what a CEO would do if he was really interested in truly just diversifying the business into retail and having a, you know, a different direction. Not only that, but it also, like, look, if there's 100 grocery stores in one area

and one company serving 50 and one company serving 49, right? Like, you and my's wholesale distribution, we're never going to be able to get in there because there are local economies of scale to distribute them, right? So it could also be, hey, I'm going to go into these places where I'm historically weak. I'm not pissing off any of my current customers because they don't have anything there. And, hey, I can actually go compete in these places. because I can use myself, kind of what Amazon has historically done with a lot of their stuff, right? They spin up AWS because they're using their retail services to bootstrap.

Like, I could imagine a world where that would happen. And the, you know, they started on the East Coast. They're more of an East Coast business, and that's, and most of the Devastructures are West Coast. They showed their map of, you know, they're national, but they have big holes in the Midwest, exactly some places you're getting stores. So it has synergy with their wholesale and distribution business in markets like Los Angeles and things. The reason that Kroger and Albertsons are both there is they're great markets. And if they can get a great cost structure to compete with Kroger, those might be good localities to be in.

One last question on CNS, if you don't mind. At one point, it came out that CNS didn't have any data scientists on the retail side. And I thought that was crazy based on, you know, everything we talked about where Kroger's Albertsons, they're all like looking at each other's pricing daily, doing all this data sciences. But I was kind of wondering, I could paint that on one side, hey, point for the FTC, CNS does not care about this retail division. They're not even hiring data scientists, like they're not doing the basic block and tackling.

Or I'm sure the defendants, when they come out and they have their experts, they're going to paint it as, hey, CNS is understaffed right now. But when they inherit this great Albertson's team with their data scientists, like, they're going to have a real shot at retail going forward. It was just a throwaway line there, but I wanted to ask you kind of what your read are. Obviously, I've led the witness and a little bit here, but it just kind of what you read on that lack of data scientists was. So we really have two different things going on in terms of the FTC, especially with Mr. McGowan, we're showing that this is a completely inept company in retail. it cannot handle this. They did a very good job of that.

What we saw later is that this is super transformative for the company. And most of the, you know, you're not going to be hiring and building up your retail unless the merger goes through. So we're talking about the current and past state of the company versus the future if it does go through. And I think it was something like 16,000 employees they expect to come over from the Albertson side. And I think it's like 1,000 are in management. And Susan Morris, who's like a superstar in managing supermarkets, she's going to be coming over and become the new president. My questioning is, why didn't they let Mr. Mityown go before the testimony as opposed to demoting them, you know, if the merger goes through afterwards? I at this point believe that it's transformative

and it'll be a completely different company the data scientists and everybody probably be there post merger but it does give a lot of questioning as to you have no historic track record right you're talking about something that's transformative the promise is there

but how will it play out it does look like a very you know risky uh situation and this kind of bridges into rebranding i was surprised by the amount of rebranding it's it seems like it's almost half the stores and there's some emails um internal to see and ask you know croger's giving their worst brands and those are the ones you're going to rebrand too as kind of their own brands um there is a lot of goodwill to make up uh and the lot of the testimony from especially like mr connop with rayleys who you know and others who had experience with rebranding a rebranding is very very difficult seemingly and i i came my way that if you rebrand you are going to lose a lot of the uh you know current people who have been shopping at that store and love the store

and it's almost like opening a store um and i think it's very disruptive to rebrand and there's seemingly quite a bit of rebranding that's going to need to take place and that does put a lot of question marks in terms of how those will perform. I was surprised by testimony and rebranding

because to me, maybe it's just because I'm a dumb dumb, but I just thought, oh, like, I remember when I was a kid, the local the local shop got bought by Albertsons and they changed to Albertsons and my mom and I still went to the same place every week because, you know, it was the closest place, it was a five-minute drive. And actually, I remember being kind of pumped

because they switched to Albertsons and, like, the store got noticeably cleaner. But, you know, I was 12 at the time. But the re, go ahead, go ahead. I was going to say, and they're putting a lot of money into the stores. There is going to be, you know, remodels and refreshes. And, you know, the smarter place to put the money is on the ones you're rebranding. So everybody who comes in that one time to see what the new store is like,

see it as an improvement. And I think. that it could go very well. At this point, I do feel that CNS could operate the stores. And to me, I think the most important thing that I don't know the answer to yet, and I probably won't know until the defendants put their case, is how after these divestitures, is there still areas of overlap? Is the divestiture very complete? If so, I as a consumer, would be pro-merger. if there's areas and markets where there's, you know, still in close proximity that they weren't not divested between Albertsons and Kroger, I see that as a problem.

I would want a very complete divestager. Let me come. Speaking of divesture, I agree with you. And obviously this is, you know, shaping out a divesture that takes away all the places where Croger and Albertsons are going to have like a monopoly or something is basic blocking tackling for antitrust. I just want to come back to at the start of the. this segment, I mentioned Hagan, right, which was the divester package in like 2015 or so.

Devast 100 or so retail stores. The divesture fails almost immediately. And I believe it was Albertsons is buying the back for a song, you know, a year later. Hagan, I think, looms large over this divester package because the FTC is saying, hey, in that case, you sold, if I remember correctly, it was like a company that ran eight grocery stores. You sold them 120. They couldn't manage them.

They filed for bankruptcy soon. FTC is trying to paint parallels here, right? CNS has 15 grocery stores. Sure, they're a big wholesaler, but everything we talked about in this is they're painting CNS as unable to run grocery stores. They're saying, hey, this will be Hagen 2.0 if you publish this. They're buying it maybe just to get the real estate. They're going to sell it.

They're going to shut it down. And all these consumers are going to be left with a monopoly, right? The divesture will have failed. Albertsons and Kroger's are clearly trying to counter that. We've talked about why to trust CNS and everything. So I don't want to talk about that specific of art. I just want to talk about to you, how has the Hagan just parallel overviews?

How has that framed this discussion in which side do you think is kind of doing a better job of painting this as this is Hagen 2.0 versus this is not Hagen? I would say so far the FTCs have been doing a better job painting the picture. And it's not just Hagen. It's a long history of flirting with retail and failing.

So they went into retail. They made a decision to exit retail in 2010. They sold all their stores in 2012. The day you're referring to as CNS has a history with- Correct, correct, and I should have made that clear. And then CNS during the periods before, they were still acquiring stores, but mostly to broker them out and sell them to their distribution customers. They almost looked like they went into the business of brokering supermarkets.

of acquiring and selling with no intention to operate. And then the Higgin fiasco where they declared bankruptcy and then the Piggly Wiggly stores, they got them from Tops and this was I think 2019-ish and that was what Mr. McGowan

was in charge of and they're still running these. So all they're pointing to as their current experience is running is this handful of Piggly Wiggly stores in the Chicago area, and they also have stores in Wisconsin, and they're underperforming. It didn't look like a company that's committed now to retail. It looks like, oh, we've seen this story before.

And is this part of the long history of the company not really taking retail serious and just being committed to its wholesale business? Or is this time it's different, where it's truly transformative. The number of the stores and the amount of people look like truly transformative. The history of the company and the roots of the company and even some internal emails that they had with customers looks like it's 2.0 of their history is worse than happened in the past. That's true. Though, as I've said, this is a halftime report. I, just based on my reading of your email, so I'm just parroting back to you, I agree with you.

But this is obviously so far only the plaintiffs called. So I think the defendants have a lot to shore up, but, you know, they will have an opportunity for this up. Let me go to a different place. Day three was all about the workers, right? The FTC, to a lot of people's surprise, has included in this suit, not just, hey, you know, you're going to have the, you're going to have a monopoly in local markets. X, Y, and Z if this merger goes through, hey, this divesture is a bad package, so it should be blocked. They've also included, hey, Albertsons and Kroger's are both union shops. If you let this go through, then union workers, they're going to have a monopoly on union

workers in local markets, and you should block it on that organized labor reading. I, you know, I have historically thought that was a poor argument. I don't think anything's ever been blocked on organized labor before, but I will say the FCC kind of has, the DOJ had the case where the DOJ successfully blocked a merger because it was two publishing houses that were going to merge, and they said, hey, high-end authors aren't going to have enough publishing houses that this happened. So I can kind of see parallels there. Day three was all about organized labor.

I'll let you tell the story, but they had the labor chief who came, testified, and then did a press conference on the court's doors that and confirmed in the testimony. But how do you think the labor arguments is going? What's going on there? All of that type of stuff. the labor i thought was some of the most entertaining testimony and uh you know right when i came in the courthouse on day one there's the unions giving a press conference side by side with the line of lawyers that are entering the court uh and all the cameras and all the press are uh it's it's not

that great filming a line of lawyers going into the courthouse so they're you know get the unions were getting a lot of attention um i've at this point feel it's a side show i don't think it's going to be determinative. I came away feeling like the unions, Mr. Clay specifically, I think he's the local 5-5-5

up there. It kind of gave the appearance that he's taking advantage of the merger, you know, to get a better deal with his current negotiation. So he's currently, it was admitted, he's currently in negotiations with Kroger.

It was admitted that he currently was in favor of the deal and put out a press release. He, you know, both him and Mr. Wynn testified about their original meeting, which was back in January, I believe, of 2024. And, you know, everything seemed positive. And the timing, it was, I believe, in August. It was very recent when he switched and started posting the deal. It was like two days before the trial, right? Because I think he published in January, he published a PR that said, I support this. And then like two days, days before the trial, he said, take axes.

I have it in my email, but I think it was August 18. I could be wrong and refer to my email, but yeah, it was like a week before the trial. Then it looked like they took a strike vote right away when he flipped. So he had the approval for the strike. The strike was only announced the day before his testimony. The strike took place, the day of his testimony. He gets on stand. he's going to leave the stand

and go downstairs and hold his brass conference and he's in current negotiations with Kroger and then when I hear the arguments as to you know why it's bad for unions there wasn't enough

there to overcome the current optics I kind of view the whole labor issue as a side show I do that actually brings us nicely to this case has become politicized, right? Like, Kamala Harris has talked about

high grocery prices on the campaign trail. I believe she specifically mentioned this merger. It's obviously like, even though in the grand scheme of things, two grocery stores merging is very small versus we mentioned Walmart, Target. You know, it's a local thing and people have been, between that, the labor case and everything,

there is an air of politics to this. I just want to, is that infiltrating? I think it might have, just because Labor's mentioned, but is that infiltrating the arguments here at all? Are you feeling that in the case, or do you think the case is still kind of blocking and tackling? I feel everything in the courtroom is fine, and I don't think the politics have entered. That being said, the press that's been coming out of the courtroom has really been highly politicized and really latched on this one specific testimony of where egg prices was very volatile.

You beat me to it. You beat me too, and I was going to ask you about this email. Walmart lowered the price of eggs, and Albertsons didn't. Now, they're price checking off Albertsons. So when Albertsons didn't move, they didn't move either. And it looks like, aha, they're getting higher margins on eggs. And so a comment of price gauging slash price gouging from someone who's currently running for president, you know, looked all of a sudden plausible where there was, you know, prior no evidence that anybody could point to.

That, to me, looked like, you know, is a one-off product in a volatile pricing. It seemed like that was way overblown by the news stories that came out of there compared to what actually happened in the courtroom. I was going to ask you about that. There's another, just to give the other side of it, there is an Albertson's president who has a quote, I think it was from email, but it might have been in testimony, where he says, hey, look, when it comes down to it, Albertsons is hopelessly higher price than both Walmart and Kroger. And I was just kind of laughing at you, an employee admitting, hey, yeah, like our cost structure is, we're pretty boned over here. That actually does take, unless you want to comment that, that takes me nicely to the last check I wanted to.

It felt like Albertsons, some of their, some of the stuff they've said, it felt a little bit spirit like in the point that they're saying, hey, if you issue this preliminary injunction and this merger doesn't go through, it's going to be bad. bad for consumers. Albertson's higher price than Kroger's. If you issue this preliminary injunction in the merger breaks, we don't have a backup plan. Our backup plan, serverist controls us. Our backup plan is, you know, we're going to have to sell off stores. We're going to have to shut down stores. We're going to have to sell ourselves to a big bad private equity.

It felt like almost they were saying, hey, you need this merger go through because if it doesn't, like the plan B is even worse for the consumer. And it did remind me of spirit saying, and it has played out, spirit saying, hey, if you don't approve this merger, we're going to have to do a lot of the merger stuff ourselves, but without JetBlue to protect us. We're going to have to cut flights. We're going to have to raise prices. You can either do it through this merger or we can do it on our own, but one way or the other, it's going to be bad. How is that played just when you've been in the courtroom? So I've had some of the most honest and convincing testimony there was Mr. Clay, the labor,

why he was originally for the deal. Yes. He said with CNS, and he says, here's a guy who's committed to the industry. He wants to to make better stores and invest in the stores and better stores are better for better workers. And he looked like he flipped because he started talking a lot of other unions that dealt with CNS and it made it sound like CNS has a very kind of anti-union mentality. And, you know, and the information he subsequently got is his explanation for why he switched. he also alludes to information that he got wall in negotiations with croger there wasn't a lot of specificity but he learned things in that negotiation that allowed it you know made him flip but his

original belief is cns is committed to the industry and he saw a you know private equity firm that owns the majority albertsons that the writing on the wall is we're hopelessly high price we're going to be the loser against croaker and we want out and they're going to get out one way or another, and he saw the alternatives is worse. This episode is sponsored by our friends at YCharts. With all the various job functions that advisors are tasked with, your time is extremely valuable and often scarce.

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can be the missing piece to your service so you can act on an idea right when the light ball flips on. If you're watching this podcast on YouTube, or you read any of the blogs, you'll see we start every YouTube with the Y charts of the stock price that we're talking about on it or on the blog, I insert lots of Y charts into

the blog and there's this reason. It's fast, it's simple, and the charts look really good. Without taking a lot of time, I can get these charts into the videos and into the blogs and worry about writing, making podcasts, doing other stuff. So, look, if you're interested in Y charts, click the link in the show notes to get 15% off your initial Y charts professional subscription when you start your free Ycharts trial and tell them I send you. Perfect. I have one last question for you, but before I asked the last question, we've gone through all my notes. I think we've done a nice job of covering so far. Again, we've had four days

of 14 of the trial. I think we've done a nice job. But is there anything that I didn't hand in the trial that you think we should have hit, anything else that kind of top of your mind that you think it was important so far? The top of my mind is really to what to watch for from here going forward. And I don't feel I have a great handle on the, at this point in the trial, the totality of the divestitures. I want to see the defendants show me that there's not areas of overlap within a certain, you know, miles of stores. If the divestitures are very complete, I think the deal should go through. I'm currently of the impression that it's not and that there should have been more divestitures

and I think any area of overlap I think could block the deal and I lean at this point towards the FTC that could all change in the defendant's case I also think that there's a lot of dispersion of CMS's both ability and intentions and I think Susan Morris is going to be the star witness to, you know, convince the courtroom that this is transformative and her ability to do it. And, you know, probably a lot of questioning on how they're going to pull off the rebranding without, you know, much impact negatively and a lot of the strategy there. So I think, you know, CNS's ability as a competitor, I think we'll likely be short up in the defendant's case. And you know, the, you know, the, um, shoring up the history of the company with failed

forays into retail, that, you know, that needs to be done. And the complete, the number one thing I really think is the completeness of the divestitures. I think that if there's complete divestitures, this is a good deal for consumers. Consumers should be, you know, really wanting this deal so that all the prices can go down in Albertsons that aren't near a crowder. But any area of overlap, the person in that market would probably be unhappy. No, that's great. Look, you mentioned it.

My last question, you started to lose to it, but I have to ask you. I know you don't love you. But as we sit here at halftime, again, the FTC has presented their case. Albertsons and Krueger's have not. But as we sit here at halftime, you said you're leaning towards the FTC case. It seems like that can be turned. But if I had to give you, hey, here's the odds. What would you put the odds for the FTC at right now?

Do you think they're 75% likely, 55, where would you put it? That's a tough thing. And the reason I say that is there's so much that could happen going forward that could completely flip me. At this point, I'm probably 70-30 in favor of the FTC. I think right now the deal looks bad. But I could completely flip if I was convinced that the divestitures give no area a geographic overlap.

It sounds like, again, a lot of this is under seal, but it sounds like if they came out and they held up a map and they said, Mike, there's only 100 stores in this circle where we have overlap. Those are the only overlap stores, and every one of the stores in this circle is getting divested to CNS. It seems like that would flip you to the Albertsons side. Now, we still have, does the judge believe CNS is a credible buyer,

but it seems like that's what it would require to flip you. Even a simple statement as post-merger, there will be no area of overlap within 20 miles. That would be enough for me. And obviously you can have overlap if there's like four other grocery stores there or something. You need no monopoly overlap. I would even say even if there's other stores and it's a crowded metro market, the degree from day one of how these stores look to each other are pricing off each other.

I really think that there should be a geographic boundary that there's no overlap within a certain number of miles, arbitrary, I might say 10, 20, 30 miles, but there should be a distance that people normally wouldn't travel to a traditional supermarket for, and there should be no stores within that range. if there was that level of divestrator, I as a consumer would be super positive on this deal. And I believe that CNS, with the transformation that's coming over, you know, in the number of resources from Albertsons, I think they could probably do as good of a job as anybody. Well, this is a tough one because the merger has been stuck here for so long. And Albertsons has built up so much cash, but the Albertson's business performance has been tough. It's tough for me to say what the market is pricing the odds of this is because it's tough for me to describe a downside to Albertsons. It's already trading up four and a half times EBDA. So I would say, hey, you're leaning FTC.

It feels to me based on my talks with the other ARBs that people are feeling that way. But I can't tell you because I don't have it's under followed in the investment community right now and I don't have a strong downside. but I'll try to firm that up before the, before we do our follow-up with, you know, we'll have, hey, did Kroger and Albertsons manage to present this to Mike in a way that he thinks is? But Mike's going to come on for a follow-up once the trial completes in about two weeks. Mike Cohen, I'm going to include a link in the show notes if you want email him, but I just want to start of the next episode, remind me to put this in the front because we need to have it in the front. But I wanted to include two quick things.

When we were talking Spirit JetBlue, I believe you told me this offline, but I feel comfortable seeing it at this point. you were at the trial and there was a point made and you told me the guy sitting next to me was a consultant for someone with Hawaiian Alaska and when he did that point he pumped his fist and he was like this was like a week before the merger happened but it came out when he pumped his fist he was like that's what we were looking for and then the Hawaiian Alaska merger got announced and that deal was fraught but just this month the DOJ cleared it and the whole time I was thinking damn like my I'm sure there was a lot of going on. But Mike had it, like, that is the best guttle, but I've ever heard where a consultant

was like, that was the point we needed the DOJ to make and the judge to make. And they cleared it and the market didn't go look at the Hawaiian stock price. No one thought the DOJ was going to clear that. But that went cleared and I was thinking of you the whole time. So I need to tell that story at the start of stock price because people are going to want that story. But look, people should subscribe to Mike. I love it. You cover so many different things. And the world is getting more litigious and these things are getting crazier and crazier to follow. You know, I've talked on this podcast a lot about liquidity. I know you cover it because you send me the emails every every day. I mean, all the mergers and all the lawsuits and the fall on there,

that's gotten crazy. You've got this, Hawaiian spirit. Like the world is getting crazy or more litigious. And if you're trying to follow it, especially as a generalist, you need Mike. So Mike, thanks so much for coming on. You can say anything to that if you want to add on to it. I just say thank you for the kind words. And people can look us up at MDC Financial.com. I always enjoy being on your podcast, and I look forward to the next one. I appreciate it. So we'll have me back on in a couple weeks when this follows up and looking for you. Thanks again, Mike.

Great. Thanks. A quick disclaimer. Nothing on this podcast should be considered an investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.