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

Episode Date: September 23, 2024

Michael D. Cohen, CEO & Director of Research at MDC Financial Research, LLC, joins the podcast to provide his post-game report on $ACI / $KR case. For more information about MDC Financial Research, please visit: https://mdcfinancial.com/ Chapters: [0:00] Introduction + Episode sponsor: Tegus [2:20] Overview: his post-game report on $ACI / $KR case + Michael's comments on the judge [6:25] Now that the trial is over, how the case went overall in Michael's opinion [15:14] What were the reactions from those also in the courtroom with Michael [20:36] Joe the Grocer testimony [25:50] Due process arguments / price checking [31:21] Experts, who was most believable [40:01] What Michael saw and hear regarding CNS as a buyer / confidentiality (close courtroom to the gallery) [45:11] Closing arguments / anything else jumped out to Michael from the trial [49:44] Possible outcomes for the case / incentives for why each side wants their side to win [57:05] Michael's guess on the odds of a preliminary injunction coming down here / is it more fun to listen to a well-reasoned case from both sides or more a Kangaroo-court style case [1:00:54] Hot docs / final thoughts Episode sponsor: Tegus If you’ve been reading my newsletters, you know how often I rely on Tegus for my research. It’s truly revolutionized how I get up to speed on new industries and companies. Tegus has the largest transcript library in the world, with over 75% of private market transcripts. Whether you’re curious about AI, biotech, or any niche market, Tegus has the insights you need. What sets Tegus apart is its all-in-one platform. It’s packed with expert call transcripts, management checks, panel calls, and in-depth financial data. No more jumping between different services or piecing together fragmented data. With Tegus, everything is right at your fingertips. The best part? The insights you get are from the very people shaping the industries you’re interested in. You’ll find perspectives from insiders and executives that you simply can’t get anywhere else. To see Tegus in action and understand why it’s my go-to resource, visit Tegus.com/value – that’s T-E-G-U-S dot com slash value. Trust me, once you try Tegus, you’ll never look back.

This episode is brought to you by Teegas, the future of investment research. If you follow my newsletters, you know that Teegas is one of the things I use most often. Almost every post I have has some clip from an expert call or some quote from a management transcript that I've got off BMSEC that, you know, it's because of Teegas that I've got access to all of that. It's revolutionized how I get up to speed on new industries and companies. I've been a happy subscriber of it for over three years now. And I tell you, I use probably every day I'm logging on to Tegas to look at an expert call transcript

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If you like this podcast, it means a lot. If you can rate, subscribe, review, wherever you're watching, listening to it with me today i'm happy to have the man the mythful legend from mdc financial mike co and mike how's it going it's going good and thank you for uh having me back and this is the uh you know we had the half time and now's the uh the the end of it we had closing arguments on tuesday and uh finding is a fact and conclusions of law are going to be due on september 27 so there should be no ruling prior to that and then after that you know the windows open and uh i think when the judge rules, it would rock the stock.

Mike's beating me to everything. Before we get there, just let me start the podcast the way to do every pod. Nothing on this podcast is financial advice. Quick disclaimer. We're going to be talking about a legal court case today. Neither Mike nor I are lawyers. I just remember absolutely no legal advice, financial advice, consults financial advisor, do your own work.

As Mike said, we did a halftime report on the ACI Proger trial. today Mike was there every single day we're doing the post game report right Mike we can update on how everything's gone all of that so Mike before we get there I just want to ask you one quick question you know I'm a sub to MDC people can reach out I know I've connected plenty of people with you and they should I think if you're doing legal sits you need to have somebody in the courtroom but I'd love to just ask you I read about three weeks worth of emails from you every day in the courtroom you know when I'm reading them versus when you're in there like what are you kind of seeing, and it doesn't have to be this case, but what are you kind of seeing when

you're in the courtroom that maybe you try to relaying the emails, but somebody who's just reading or hearing from it might not be picking up on? I love attending courtrooms. I kind of feel like I don't really know the case until I've actually been in the courtroom. You see the parties, you kind of have a familiarity. Every courtroom, every case has kind of a different feel. There's just kind of little nuances to that. If it's an important hearing or ruling that I'm waiting for. I'm really watching the judge. If it's a trial, I'm watching the jury. I'm trying to get a read on their mind. Unfortunately, in this case, this was probably the worst judge ever to try and read her mind because she had probably the

best poker face going and she, I don't think she asked a single question through 14 days of hearings. She really just let the parties play out. She had a kind of a fusive, loving, towards everybody. She definitely had no preferences to anybody. A very hard read on the judge herself. So all I really have to go is the case. On the judge question, it's interesting you said that, because in my notes, there's only one question

that you wrote down that she asked. She asked Ms. Florence, who, if I remember correctly, she's one of the people at CNS. She asked Ms. Flores some background questions on CNS and their prior attempts to diversify into retail, which I thought was very interesting. We'll get there in a second. But one more question on judge. I agree with you. Like every time you put a comment in about the judge that, you know, as I read into that and, you know, we did all the stuff on spirit and we were all trying to read all the tea leaves with the judge.

How often do you think the judges, just in your experience, right? How often do you think the judges kind of tip their hand through their questions of everything? Because I know as event-driven investors, we read everything into the judges. And I just want to know, you know, you've got a few more case under your belt than I do. How many times do you think that's an accurate read? It really depends on the judge. There's judges that are very sensitive about stocks being public companies. They'll issue their rulings, you know, after market hours.

There's others that pay no attention to that at all. And there's many judges that, you know, we get ruling from the benches sometimes. We get questions that are so descriptive, you know, it's a very clear read. I'm taking a Judge Andrews specifically. We've had several recent hearings with him. and he typically has a very good poker face until the very end. And then after closing arguments, he'll kind of grill both sides that are very revealing of where his thoughts are, you know, at the end.

He doesn't always do that, but he sometimes does. And you sometimes get a very good read, and sometimes you get none. And unfortunately, in this one, the judge left us with none. So that's great. I'm just curious, and I thought listeners might be curious. just from somebody. I can guarantee you, you know, the average podcast gets down. I say dozens. It's thousands, but I can guarantee you very few of them have spent a lot of time in courtroom. So I thought that might be a interesting background. Let's move to the case itself.

You know, as we said, we already did the halftime report. People can and should go listen to that for background. The halftime report was done generally after most of the plaintiffs, most of the government's experts were done. Most of the rest of the case was the defendants and then the closing arguments. So we'll talk about all that in a second. I've got tons of notes. But I'd love to just start with the too long didn't read for anybody who just wants to listen to the first 10 minutes of the podcast. Overall, what were your thoughts on the case? And how do you think it kind of went? The case started with the plaintiff's case. I think the plaintiff started very strong. They started with a lot of the pricing people from both Kroger and Albertsons.

It very much looked like these are competitive companies pricing off each other. Then they had Mr. McGowan, who is the head of retail, for CNS, who's buying the vestitures for $2.9 billion. And he was a horrible witness for the defendant. And really since the halftime show that we did, I've been warming up more and more to the defendant. case. It was, I think that really started with the plaintiff's own economic expert witness who kind of abandoned the original market of traditional supermarkets. He went with a very broad supermarket definition. It includes Walmart. It includes Amazon Fresh. And then to that, he added the large format definition, which really seemed the one that he liked and went with.

That includes basically, you know, everybody but convenience stores. It added club stores. It added, you know, whole foods and sprouts and gourmet stores and, you know, sorted item stores. It's, I thought it was a very reasonable market definition that came from the plaintiff's own economic expert. Something you should probably ask about later, there actually is a procedural question here. I've got it in my notes. Yeah, absolutely. We'll get to that one later in terms of, did they plead? this market that they're kind of going with. So that's why I started warming up to the defendant's case.

I think the defendants made a very good case with regard to the union. It was sort of a sideshow all the way through. And then when they had their own expert witness on labor relations, there was an economic expert on labor that he really showed that the The collective bargaining agreement area market, as they defined, it really is not a market. In places like Southern California, you know, it's huge, covers like 20 cities, and other places it's very small. It really did not look like a valid market definition. And so there's two parallel cases here.

One is, you know, harmed a competition in the labor market, and one harmed a competition in the consumer market. seemingly you could get an injunction by either prong. I would be shocked if she sides with the labor market. I think that was a side show that got shot down during the trial. After Mr. McGowan, you mentioned Ms. Florence and the CEO of CNS, Eric Wynn, they did a very good job of showing CNS as inadequate acquire. of the divestiture assets. The star witness for me on that front was Susan Morris, who's the current C.O.O. of Albertsons.

Yep. You know, with her in the lead, you know, roughly 1,000 managers, 16,000 people coming over. The past failures with divestiture assets from Mr. McAwen to me look irrelevant. And I became a believer that CNS knows what they're doing. that they're not just going to, you know, use these divestiture stores for the real estate value, which is about $2 billion of the $2.9 billion, that they're very serious about getting into retail. And I think that this is a transformative event in divestiture that would allow them to successfully do that. I came away with that feeling.

At the end, I come away kind of siding for the defendants in terms of, I think this is a merger that should go through. The problem is, at this point, I think that we have presumptive markets that even Dr. Israel agrees with at the store level, not at the price zone level, in Santa Fe, New Mexico. And I think all the benefit is in markets other than that market. So I kind, well, not kind of. I probably, probably even strongly is the right way to say it. I think that Judge Nelson is going to issue preliminary injunction here, but I don't think that necessarily is the end of the story.

I think the parties have just too much invested. They want it too bad. This deal will reinvent itself if necessary. I think that this is a merger that should close at some point. I just think it's going to be preliminary and joined here. Yeah, you know, it's interesting you say that. We'll talk about Santa Fe. We got into Baker Hughes.

I guess the one thing I would warn listeners, and not warn, but you and I did a long conversation, a lot of conversations on the Spirit merger. Those were some of the most popular podcasts we had. I think both you and I, I don't want to put words in your mouth, you can agree to agree. Both you and I thought that merger should have gone through. I think Spirit did a, JetBlue, did a really nice job in their case.

But ultimately, the judge basically said, hey, there are 30 routes, there was more to it, but one of the issues was there was 30 to 40 routes where he said, this is a monopoly. And whether you believe there are national benefits or not, there are 30 or 40 routes where they're going to have market power and I have to block on that reason. And as I was reading through the Baker Q stuff and seeing, hey, you even wrote in one of your emails, nationally this will cause prices to come down. That's what Proger's leaving. I think you think that's a rational argument. But as there's a nationally benefits, but local harm in one market, Santa Fe.

And I remember, I asked you with the spirit, I was like, hey, if Miami to Puerto Rico, if that's a monopoly problem, do you really think a judge would block that? And both you are kind of like, no, like these airline assets will move. That's just one market. The answer was yes. And here I was kind of like, just Santa Fe, New Mexico might block a national merger. I'll let you comment on anything. I rampled a little bit, but.

Well, I still think that's a merger that should have gone through. Well, I would refer you to stock price, spirit, stress. Yeah, absolutely. It obviously didn't go through, but I feel that the judge, you know, this is my opinion. I think that the judge, he had a hypothetical person that wasn't even a real person in this, you know, person who's going to fly to see his mom from Puerto Rico, and the judge said, this one's for you. I don't feel that he really did a this presumptive market has the harm and I don't think he credited the defendant's expert at all. He just straight went with the plaintiffs. And I felt that in every single market, I think that harm, there's harm to individuals in the market.

but I think that the benefit to others in the same market overcomes. And I think that you can't take like national benefit and apply it to Santa Fe, if you like here. But if there was harm to some consumers in Santa Fe and the overall benefit to others in Santa Fe, overcome it, my understanding is that could rebut the prima facie case of that market and did not so with regard to JetBlue and spirit. You and I completely agree. And obviously, people can go listen. I was very, very wrong on that.

People can go read my make a couple. Before we start diving specifically in the case, I want to ask you one more question. You were in the courtroom. I know you're talking to other people while you're there. I just loved to hear when you left. when you're talking to people, what were they focused on, what were like kind of everyone else's view of the case that you were hearing? What did you think was the one big thing that was jumping out to the peanut gallery?

There were a lot of reporters here. There was probably more reporters here than there was jet blue and save. If I can just add, I agree, because, you know, AP articles, CNN articles. I opened Internet Explorer one day and it was front page, like the Kroger Albertson merger trial is heading to close. And I was like, wow, there were just a lot more reporting articles. And that probably speaks to food inflation is a big deal. It's a political thing.

And these are companies that, you know, everybody knows. Everybody shops up. Please continue. Yeah, this seems to have more consumer interests than JetBlue and Spirit and less risk arb interest. That being said, there was a lot of risk armed people in the room. There were analysts from the sell side in the room that, you know, report to the risk Garb community, people probably also like myself in the room, it was a fair mix of reporters and

people from the investment community. When you just look at the share price of Albertsons, it looks like nobody believes this deal is going through. I'm probably one of the more bullish on the stock, but I'm still pessimistic in terms of her ruling from this 14 days. preliminary injunction hearing. Yeah, no, I'm with you. I, you know, I talk to a lot of event and risk our people, and I would say my general feel is most of them when I talk to them, it's bleh. And most of them, or most of them when I talk to them, it's kind of along your line. I think a preliminary injunction is going to come and I kind of like don't want to buy in front of that. I think like there might be plays on the back end, but, you know, most of them

are kind of blah. And I'm surprised because look, Albertson stock, it's at $18 per share. If this deal goes through, the payout, if I remember correctly, is 2725 post the special div. That's a lot of upside. And I know people, when this merger happened 12 months ago, they were underwriting the downside in like the low 20s. I don't know where the downside is. It's a little bit of a e-liquid stock. Groceries is tough business.

Albertsons has said in court, hey, if this merger doesn't go through, it's not going to be pretty for us. But trades had a really little multiple. So I'm kind of with you. I think you had in one of your emails like, hey, yes, PGA probably comes, but I think the market's underestimating the odds of this deal going through. I'm kind of with you. It just seems like the market's at zero and the right answer is, you know, 25. I don't know, but you can comment on any of that you want to.

Yeah, it's probably worth pointing out that a big part of the defendant's case here was the quasi-flailing firm and they made it sound like, you know, the dynamics or the industry are changing. You know, Kroger's the strong one. They can only compete with Walmart, you know, with Albertson's assets and Albertson left alone, we'll just slowly die. And the CEO said, you know, he can't guarantee he won't be closing stores if the merger doesn't go through. That was the one part I thought of the FTC's case I really believed, is that Albertson's was a strong company. There's nothing wrong with Albertsons. All the internal email showed that they were gaining share on Kroger. While they weren't price competitive with Kroger, something about the

experience or non-price competition, Albertsons seemed to be doing fairly well. And I came away believing that it was really a large selling shareholder that's motivating the deal. And I think motivated them even going public rather than, you know, anything that's foreclosing their, you know, future survival as a company. So when I look at, you know, a P ratio of nine, it looks to me like it's basically priced nearer bottom. You know, I'm with you. It's just, it's been hard to get conviction. I think part of the reason it's been hard to get conviction there is whenever I talk to people, they kind of shrug, and again, I'm surprised about that. This episode is brought to you by Teegas, the future of investment research. Look, if you've

been reading my newsletters, you know how often I rely on Teague's for my research. I probably read one or two expert calls a day, you know, probably average seven a week off of Teegis. They've got the largest transcript library in the world with over 75% of the private market transcripts. Whether you're curious about AI, biotech, or any niche market, Teegas has the insights you need. What sets Tegas apart is it's all in one path? platform. It's packed with expert call transcripts, management checks, panel calls, and in-depth financial data. No more jumping between different services or piecing together fragmented data. With Teegas, everything is right at your fingertips. The best part? The insights you get are from

the very people-shaping the industries you're interested in. You'll find perspective from insiders and executives that you can't get anywhere else. To see Teegas in action and understand why it's one of my go-to resources, visit tegis.com slash value. That's teagus.com.com value. Trust me, once you try Tigis, you'll never look back. Let's go through some other things that were just jumping out to me. So we talked about what you were hearing at the courtroom. I think you mentioned in your opening, let's ignore labor. I think most people have said labor is a sidetrack. It would be interesting if the judge ruled that the labor was a market and she needs to block this because that would have a lot of interesting ramifications for deals going forward.

But most people think labor is a losing argument. So let's set that to the side. I'd love to talk about let's start with i want to start with the joe the grocer commentary because i thought that was the most explosive stuff and we're starting to get into the middle of the podcast let's keep people listening uh the joe the grocer testimony was mr joe welsh i'll let you kind of describe how that one and everything because i thought that was the most explosive and that was the one when i was reading i was like look when something goes really poorly or really well that's where you could kind of see a judge's ruling changing and if this still went through i think i would point to this one of the reasons went through. So why don't you go ahead?

We're mixing apples and oranges a little here because Joe the grocer was the one that's, and anybody can watch this, this is being streamed from the state of Washington court. So the preliminary injunction hearing that was 14 days, that was in the District of Oregon and Portland. Oh, I got confused when I was talking and I had them labeled. I must have moved the two emails over. Oh, that changes everything for me. Hey, there is a lot of witness overlap. A lot of Florence was right. before Joe the grocer. That being said, I thought Joe the grocer had to be one of the worst witnesses for an expert ever. I didn't think that he helped the plaintiff's case at all for the

state of Washington. And we should probably tell people, there are state cases here. There's state attorney generals chiming in. There's already an injunction in force in Colorado. And the outside date for the deal is October 9, and it appears that Colorado will enjoin them until five days after the trial there, which appears scheduled to end on October 18. So this deal probably couldn't close at the earliest until October 23rd, which has already passed the outside date. What's at stake in the District of Oregon, the federal case, from the Federal Trade Commission? They're looking for an injunction to basically enjoying this merger for a long

time, months and months and months, so that they can go through their own internal procedure at the Philadelphia Trade Commission with their own administrative law judge. That being said, seeing the details of the case

after 14 days through a really long preliminary injunction hearing, I think that there might be hoped for a deal, even if they had to go through the Federal Trade Commission process. They probably need more divestators, probably in, you know, places like Corvallus, Oregon, and especially Santa Fe, New Mexico.

But I don't think that the deal is necessarily dead as long as the defendants are willing to go through that long FTC process. You know, well, correct me if I'm wrong. This is similar to, I probably should have brushed up on the end game here. I've just been so focused on this piece. But the PGI, correct me on heron, this is similar to Microsoft Activition, right? Like, if you don't issue the preliminary injunction, then Albertsons and Kroger can close, and then the FTC can try to pursue the case internally, but the deal will have closed, right?

If the FTC rules against it, they'll have to go unscramble the egg. So that's why most people view the PGI as, you know, from a risk our thing, that's all that matters. But the FTC generally is not going to take it all the way to court once the deal is closed without the PGI. And the PGI, if I remember correctly, the judge has to rule basically like, if you issue the injunction, it's because, yes, you believe that the companies will lose when they go to the FTC. If you don't issue, it's because you believe that the companies most likely will not lose. You can correct me from wrong on those points.

I think it's more a likelihood of harm. I don't think it's a real predict. of what will happen. It's really that we have to preserve that process so that the FTC, you know, has a chance to prevent harm. So it's kind of a low

bar for the preliminary junction at this stage. And you're absolutely right. It's very similar that, you know, when the judge in San Francisco did not permanently join Microsoft Activision, they ran and closed right away. Most people think that's done. they're still

appealing that at the Ninth Circuit and the FTC has not given up even though that deal has closed and it's a lot harder to unwind a murder than prevent one and yeah, if the parties are not enjoined, they'll just rush and close

this deal. We mentioned earlier, I want to talk about the due process argument, right? And this came up, I believe it was an expert witness is what you're referring. into. But, and I think this was the FTC, not the, the motion case, but you talked about the due process arguments. I'd love to just go into that because I think that is an interesting area here. So why don't you just hop in with that? So it really came up most clearly during the defendant's closing. It was mentioned a little bit, I think, through one of the experts,

but it really, you know, it's more of an argument, and it really was made in closing arguments as opposed to just the, you know, when the evidence came in. So what they're saying is the, when they filed the motion per preliminary injunction and the complaint for the case, the market was a traditional supermarket. Yeah. And traditional supermarkets really are a very narrow market that would not include a Walmart. for an example. Costco is certainly not included in there. Yeah, club stores are pretty much everything is out, but what you know as the supermarkets that we all had back in the 70s.

And the market has morphed. It'd be interesting to know a little bit of the back channel of what happened, you know, with their expert and what happened at the FTC. But from the time the case was brought, and motions were filed and pled to where they are now with their expert. I think the expert rightly realized that the market was so narrow that there is substitution. Everybody's shopping at more than one place, and there can be substitution between all these others. I think he was forced into the broader market.

He did bring up the supermarket product market, but he included Walmart. I think that was largely just to preserve the due process issue here. But his emphasis, he really believed in the wide format market. And that was a plaintiff's expert. That was Dr. Hill. That's why I wanted to ask about this, because from the beginning, I did my first podcast with an economist on this back in December, 2003, and he was talking about, hey, traditionally the FTC has defined these with a narrow scope, traditional grocery

stores, and maybe Walmarkets included, but it ignores Costco, it ignores dollar stores, it ignores Instacart, like it ignores all these places. And I just kind of wonder, like, why do you think from, because as you said, the first suit kind of went traditional supermarket was the definition. And then a lot of the FTC's complaint is, hey, you know, they're trying to, they're spending so much time trying to prove that Kroger only price checks Albertsons, Albertsons only price checks Kroger, they don't price check Costco, they don't price check Walmart, like these two are competing, and you can tell this because they're only price checking

each other. And in my mind, it almost a little undercuts that argument when you've got the expert who goes up there and first shifts the market to broad. second includes everything else in the market. So I think I hit on a couple of different questions there, but I'd love to see how you thought that played out through the trial. The evidence bore out that they're all price checking everybody. Yeah. There might be the ones, you know, where they price check more skis. There's ones where they, you know, price check more regularly. Daily versus weekly. I think that came up a lot. Yeah. But the evidence really bore out that they do see the wide formate market as their competitors.

And market definition is not an arbitrary process. They do the hypothetical monopolist test. They look for substitution. You've got to get the market big enough that you could raise your prices basically 5% so that, you know, people can't substitute away. If you raise your price and everybody just substitute somewhere else, your market's too small. And that seemed to be what would be happening here with just the traditional one-stop shop, traditional supermarket. You know, that has the full service meat department, full-service bakery, full-service florist.

You know, what they were defining is the one-stop shop. the Federal Trade Commission seemed to clearly have that focus initially, and it seemed like once they got a really good economist, they realized that they had to slowly morph their case to a broader market. And that plays into the defendant's hands, because Kroger's whole argument is we need this merger to compete against Walmart. And the number one seller of food in this country is Walmart. the evidence I saw made, at least to me, that a believable argument. That's good. Let's go to the experts. You know, both sides present experts. I'd love to hear how you thought both experts presented their case and which one you thought was kind of more believable. Dr. Hill was the FTC plaintiff's expert and Dr. Israel was the defendant's expert. I thought Dr. Hill did a fantastic job. job when I'm watching them on direct. I'm thinking, oh my gosh, how are they going to cross-examine

this guy? He seemed rock-solid. And they scored a really good cross-examination against him. It was surprising how well they did on cross with regard to Dr. Hill. Dr. Hill came back in rebuttal, and they still had a good cross-examination of under and rebuttal. Dr. Israel equally, he has a different style. He comes across a little less authoritative. Like, believe me because I have all these degrees, I thought he explained things well in a more common sense way. I thought he looked bulletproof on cross. I thought they scored no points on cross-examination against Dr. Israel. So typically the battle of the experts comes down to cross-examination. And I thought in that cross-examination battle, I thought Dr. Israel did better

than Dr. Hill. So, Dr. Hill, you mentioned that you thought the defendants, Kroger, Albertson, scored some points in their cross-examination. Can you give the listeners some of the examples of the points, the questions that you think they scored points on and where you think Dr. Hill came up a little short? It was all the things that he didn't look at. One that's jumping at me that was difference between the parties is in terms of the cost versus the marginal costs. And, you know, raising prices is really about incremental profit. So, Dr. Hill, he did not use increases in prices from the increased sales. So it looks like you'd be overinflating your profit that way.

And Dr. Israel seemed to accurately account for the variable cost, the increased cost with increased sales. And I think he more accurately got profit that limited the number of presumptive markets. There's two different tests out there. One is guppy and one is blinking on the acronym at C. C.M. It's a four-letter acronym. And there's a C-M-N-Hem in there. In any case, and Dr. Hill used one test and Dr. Israel went with a guppy test.

both seem to be valid ways of doing things. And I should say Dr. Israel actually did both tests. Dr. Israel came up with four presumptive markets, I believe, with the test that Dr. Hill did, all in Santa Fe. And I believe only two when he used his guppy method. So it seemed that the difference in the cost in the very, you know, the cost in the very variable costs made more of a difference in the analysis. Just one question.

We've mentioned Santa Fe a few times, right? And it just jumps out to me, and I want to go back to CNS because this was a topic of hot debate, particularly in the first piece, and you address how you think they did well addressing it. But why is Santa Fe, did it come on the trial, I don't remember reading it. Why was Santa Fe such an issue? Obviously, it's because they think it were expressed, but why wasn't this addressed in the divesture? like it seems like if there's one market that's jumping out like such a sore thumb it seems like they should just be like it's just one market let's let's give cns another 20 stores or spin off the 20 stores why was it an address they did they ever mention that you know that never really came out and that i i thought the same thing i'm the they they you know had 485 i believe was the number of divestitures and then they went up to i think it was 559 um it was um it it is it is It should have been addressed.

It's kind of strange. You get your expert there, and he's got just two and four presumptive markets. It's like, digest just a handful of things in Santa Fe, and you've got a completely different case that might even be able to close, like here and now. And I can't explain that. The expert goes up and says that, and it seems like the next day, Albertson and Gerger just come back and be like, cool, we've amended the merger to sell an extra 10 stores in New Mexico to make this all moot.

I was very surprised by that. It seems that you would think you to consult your eventual expert witness prior to the divestiture process. As you're saying, especially because it's your expert witness who's saying, hey, this merger is great for everyone except for this one market. Like, just address the one market, you know? And I have to circle back to a difference between Hill and Dr. Israel that is probably the most important, even more than the ones I said. And Dr. Hill had a 6.3-mile circle around stories. And if a Costco or a Walmart was just the 10th of a mile outside the circle, they were out of the market. And so Dr. Israel didn't think it was a circle.

He thought it was a splat. We had this amorphous shape that might go longer along highways where there's Costco or Walmart down that highway. And he was, I think, really looking at the store. that created the substitution. And to me, it was a much more realistic market. Yeah. And that was, I think, where Dr. Hill got hit a lot on his cross-examination was his failure to account for Walmarts and Costco.

It was just slightly outside the 6.3 mile circle. And he was going for the 6.3 miles really just on the draw of the focus store. where Dr. Israel was looking at the draw of all the stores in the area, whereas stores like a Costco have a much bigger radius. And he was really looking at the overlap. And the overlap of substitution creates a shape that looks like a split. The one thing, you know, I hate to keep bringing spirit up, but the one difference for spirit versus a grocery store, spirit, you know, a lot of it relied on, hey, airplanes move. So even if this results in, no competition on the Miami to Fort Lauderdale, or that's the same, Miami to South Carolina route,

airplanes will move there. But that takes a little bit of thinking, it's a little nuanced, you know, as a lot of antitrust people said to me, airplane is just a unique market in antitrust. But here, like those markets you're describing with the splat versus the circle, a judge jumps, you know, and that's why I always thought the traditional marketplace where you exclude Walmart and you exclude Costco. If the judge has a Costco membership, they're going to say, this is a silly definition. And I judge shops, and they will say, oh, yeah, the Walmart that is right off the interstate, even though it's five miles from my house and there's a grocery store, you know, as the bird flies two miles,

the Walmart is actually easier to get to because it's off the interstate. And the grocery store I have to go, you know, it takes 15 minutes on the backward. So that really speaks to me. And I don't know. Yeah, I'm not surprised if she played up better in the testimony. That led to what was I thought the funniest part of the trial was they have. they had the witness on the stand talking about private labels and he's got his Fred Meyer private label water and they said is there any other private label waters in the courtroom and yes they're Kirkland

water at FTC Council's table and and they knew the precise number there was over third I think 31 stores closer than the closest Walmart to the courtroom. And so they had the witness testifying. So FTC Council was willing to drive nine and a half miles to get that one from this courthouse going past 30 other closer traditional supermarkets. And the next day, the FTC did not have Kirkland Water. That's really good.

Last point I'm going to hit on, and then we can do anything. Just the buyer here, people have heard the whole time, if they've listened to any of the podcast on Albertson's career, you know, there was an issue years ago, the FTC made it in all of their points. Years ago, I can't remember if it was Albertson's disposed of, or maybe it was Chris, or there's the famous Hagan disposal where they dispose of grocery stores, the buyer basically immediately goes bankrupt, and Albertson, either the stores close or Albertson buys them for a song bat. And the FTC has been really critical of CNS here, right? There's the, I believe in Discovery, there's the docs where CNS talks about, hey, we're buying these for $100 million, but look, $95 million is the real estate value or whatever. That comes up. The FTC has been really skeptical.

And I think you've talked about, hey, Albertson's made good headway by saying, look, they're going to take on this real team. They've got real plans. They've got a commitment. But I'd love to just talk a little bit more about what you saw and heard about CNS as a buyer. their seriousness, their competitiveness, their willingness to invest in these assets, because if the judge believed, hey, it's all going to go up in flames, this is an obvious block. So I'd love to talk about that just a little more. Yeah, through the FTC's opening statement and through

Mr. McGowan's testimony, it looked really bad. It looked like they got divestiture assets before, you know, we believed them. And then it didn't work. The FTC, you know, reviewed that deal. It was shown that projections and information that was given to the FTC did not prove true. And I thought the most damaging was in regards to the current merger. They apparently said that if you include wholesale, their stores are profitable, meaning it's not profitable on the retail side, but we make it up on the wholesale side. And if you look at CNS's total business, the divestiture stores are profitable. It appeared that they were losing about a million a year, even with a wholesale business.

So it appeared that, you know, they just misrepresented the facts to the Federal Trade Commission on the current deal. And it was, I believe, Mr. McGowan who did that. And it, you know, came out in both the Washington State case and the one in Oregon when he was on the stand, that that happened. And you can't blame the Federal Trade Commission for not trusting the CNS when they feel kind of duped by this company in the past merger and the current merger. That being said, when I look at the whole Albertson's team coming over, and the real detail that they went through with regard to, they call it their walnut business plan. And the amount of consultants and experts, you know, they hired to come up with their plan, it's very, very well thought out. And while they be smaller than Albertsons, I didn't get the impression that they would necessarily be less competitive than an Albertsons.

I almost got the feeling that the kind of transformative nature of it and people like, soft bank as an investor, I think there's going to be some innovation that shows up. They were extremely cautious of wanting everything to be confidential when they were talking about the walnut plant. And I think CNS would do well with the divestiture assets. That's the feeling I came away from this with. On the confidential, I think it was in the SEC case. You mentioned one of the mornings, 30 minutes was spent on exactly what would be confidential and what would be kept, which you can correct me if I'm wrong, but I don't believe I've ever seen a trial where, you know, a 14-day trial where 30 minutes is spent one morning talking about confidentiality. You can correct me if I'm misremembering any of that from your emails.

I believe I have seen that in other cases. But I was really... I'm sure it happens in other cases, but grocery stores, like how unique. is a grocery circle, you need 30 minutes of confidentiality? Well, normally they seal the courtroom and kick us out for that stuff. I was very impressed how they were able to never seal the courtroom. And they would just turn it off to the gallery. And they would do their best to, you know, not mention numbers. Is, you know, the number on this line, is this one bigger than that?

They were comparing numbers and getting testimony, and they did a very good job of not having it come out. That being said, some experts slipped throughout numbers and had to be reminded. But I can see the sensitive business nature. One more question on, I believe it was in the state case, not the SEC case, but it was such a good line I just want to ask. I think it was the state case, correct me if I'm wrong, they said, hey, the, the, the, the, Sales package here was made for litigation, not for business purposes. This was designed to get this merger over the finish line. It was not designed for business success.

I think that was the state case, correct me if I'm wrong, but I thought that was powerful. And either way, it would apply to both cases. Were you, did you get the sense? Was that a place that kind of stuck a sticking point? That was in the closing arguments in the federal case. It was in the federal case. Okay. My notes are obviously a little confused between the two at this point.

So, yeah, they thought that they had two separate attorneys in their closing arguments. And the second attorney really focused on just the divestiture issues. And she described the whole divestritures as designed for litigation and not commercial success. Yes. And it was the state who went second. That's why I've got in my notes as the state's argument. Okay. Yeah.

And there is. when I watch the state case, it's deja vu. Half the witnesses overlap. It's the same issues. They're very similar with a lot of overlap. And I didn't feel that the evidence bore that out. I really felt through the witness that walked through the Walnut Business Plan, the expert witness.

And it looked to me very well. all thought out, there was, there seemed to be a bargaining process where there was things that CNS would have liked to got different private labels, you know, perhaps some better assets that Kroger didn't want to give. So there may be a little of, you know, Kroger wanting everything they can get, you know, as long as they can get the deal through, you know, wanting to be in the best competitive place. But I didn't get the feeling, I felt that CNS was doing everything possible to win in retail and is going to have these assets as a starting point and is willing to spend a lot of

money from there. Anything else jump out to you in the trial, especially in the closing arguments, but I think we've talked about enough, we don't need to specifically, but anything else jump out at the trial that we haven't hit on so far? Closing arguments of the defendant, surprisingly, were not as good as I expected. And I think a little of that is, I thought like Mr. Perry would probably be in there in the close. He was up giving the opening statements in Washington. The case was originally to end on Friday, and then the Washington case was going to start on Monday.

But due to some conflict with the judge, we ended early one day, and we ended up pushing the closing arguments. to Tuesday and then there was overlap. I'd be curious to know if they swapped out who was going to give their clothes or if that was the way it was always planned. The clothes from the defendants to me seemed more like the style you would present to a jury, kind of, you know, more emotional arguments that I didn't think would fly as well with this judge. And I thought that the government's clothes was very concise.

very organized, very, very well argued, especially the first of the two that presented for the Federal Trade Commission. And it led to my ultimate feeling is, at the store level, it changes when you go to the price zone level. If price zone level, Dr. Isol and say there's no presumptive markets. But, you know, there's an admission at the store level that there's presumptive markets. And the testimony of all the benefits seem to be nationwide

and don't really go to those presumptive markets. And that's, you know, why I think that a deal that I think should eventually close won't hear. if I had to read what you've heard, and it's interesting because some of this stuff doesn't come through when, you know, NDC for the most part is a name I see my email list, but what you're, what you kind of picked up from the trial is you think there are nationwide benefits. You think CNS is a good buyer. So those are two things that the FCC are going against. But you do think there are the local issues and those haven't been solved. And I think

the most unique thing I'm, I'm hearing from you is just based on your hearing, what you heard in the trial, you think all the companies on the, let's, CNS, Kroger, all of them are really interested in giving this deal done. So in your mind, kind of what could happen here is preliminary injunction is issued, and then there's some more restructuring of the merger. And that could be anything, right? Like, that can get very broad, but there's some more restriction in the merger, and there is a way, shape, or form where this merger can get through with a little bit of

restructuring. They might have to, they might have to make specific demands of the states. in Colorado and Washington if she rules this is Adrian Judge Adrian Nelson the way I think she is where it's really not focused on the hundreds of markets that Dr. Hill

thinks are presumptive but focused on the small overlap it lends itself you know, to a much easier remedy. If they did go through the entire FTC process internal to the Federal Trade Commission, I think that it would be pretty clear after their ALJ comes out that there might be ripe for some sort of settlement where the Federal Trade Commission feel satisfied. that's that's all very interesting you know i guess the other the other interesting thing to me is

the the company seen gung-ho on it and i will say i am no expert on the company but it has seemed like croger is really interested in getting this over the finish line but you know if i was it if the they're at if this preliminary injunction comes down like the croaker will have the right to walk and after all this battle like if you get a PJI and you have to say, hey, we have to go restrict the merger. I'm not sure if I'd be super thrilled with, hey, let's go restrict the merger, probably another year to close. We're going to have to give more concessions. But it sounds to me like you think, you know, there's, I believe, a 600 million breakup fee. Yes.

They're also, they showed a willingness to sweeten the pot already from 485 stores to more. Absolutely. I think that they think they think they need the scale to compete with Walmart, they're in a box that they can't break out of without a very, very large acquisition. I think that just get as many stores in as many places as they've let them. I don't see any willingness from the government to settle. I see all incentive from Albertson's CNS, Kroger. They spent so much money, which is uncons, costs, they seem so willing. The individual parties, the CEO of Albertsons, I think he's going to get like a $43 million golden parachute. I think it was. And I think Susan Morris gets like

a $50 million sign on bonus. $50 million signing bonus from CMS. If any listeners want to give me a $50 million sign on bonus, I'm yours. You sign me up. That's a big. That's a big sign. That's not something you do if you just wanted to sell the storage for real estate value, right? They want Susan Morris to come over. They want Susan Moore. Her emails was she was angry when the merger was announced. Right? Now she's all on board.

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maybe, I guess the merger price is going to get restructed if that happened. But I'm not reporting. I'm just speculating. You know, if we could get the graphic that had the overlap of the stores and maybe put it up on your website or something, in the east, east of the Mississippi, it was almost perfectly supplemental. There's a little teeny bit of overlap in, I believe it's Chicago, I think, in around the Dallas area, but for the most part, everything east of the Mississippi look perfectly complementary.

And only when you get into parts of the West does it get messy that they have overlap in a lot of metro markets. What I worry about those is if they start carving out those individual markets, even if everybody wants to, the government can just say, we still don't want this merger to go through. And then they have to go through the whole process again, if I'm thinking about it correctly. And, you know, if you're Kroger at that point, why are you looking and saying, hey, it's going to be another 18 months to close this deal and the government might take us to court just because they're really obsessed with that labor point. It's a tough sell. So Albertsons was originally a private company with a private equity firm. then they became public, looking seemingly for an exit.

How can that firm get out? They'd be just trickling shares out very slowly over years. And that's, I believe, why Albertson's trades its cheap. It's the overhead supply of a large selling shareholder, and nobody wants to get in there. And you'd really have to have a holding period long enough to wait them out. to reap the full value of Albertsons if a deal didn't go through. Mike, let me end by asking two questions. First, I think you've said, hey, I thought,

I think you said both, you thought both sides made a good case. You leaned that a preliminary injunction would get ruled. If I had to put you on the spot and say, let's put our gambler hats on and let's assign odds to everything, what do you think the odds of preliminary injunction coming down here are? will be in the 70 to 80% area that felt about rates me and there is a path and I do feel the door is open for no

I would be surprised if it happens but there's definitely ways you could write a ruling where there'd be no preliminary injunction here and you'd really have to attribute no presumptive markets as Dr. Israel saw them. Last question for you. So, hilariously, Albertson's is going on at literally the exact same time as the

Capri Tapestry trial is happening. And you can correct me wrong. I think Albertson Croger was generally a well-litigated case. There were good points on both sides. I think if you're paying attention to the Capri Tapestry case, people would say the government's case might be a little bit off the rails. You know, I think one of, I think they spent a lot of time. analyzing the size of handbags. I think there's some real malarkey going on there.

That's just for you as a, I know you attended this case in Nakapri, so forget that. But for you, is it more fun to go and listen into a well-reasoned case for both sides, you know, even if one side's going to win because they just have a better overall argument, is it more fun to go listen to two kind of people going really well at it and arguing both? Or is it more fun to go kind of to kangaroo court and hear one company, you know, say, hey, like, if this merger closes, purses are going to be two-tenths of an inch smaller or something. What's wrong for you?

It's definitely the former. If I'm in a court that looks like kangaroo court, I almost feel frustrated. And when I see, you know, really, I love watching closing, I'm sorry, cross-examination is, that's where cases are won and lost. And some lawyers are just so good at cross

that they just make, you know, expert witnesses look horrible. And it's a beautiful thing to watch. To see really, really good legal talent, just ripping a witness apart on the stand. It's impressive. No, that's great. I thought that might be your answer,

but, you know, seeing the kangaroo court can be fun, too. And we'll be going to tapestry. I haven't attended it yet because I've been in Oregon, but the closing arguments, I believe, is September 30. I'm going to go there. Well, luckily I'm a subscriber. Luckily, I'm a subscriber and I'm going to hear all of your thoughts on the closing arguments for Capri Tapestry

because I will tell you, I did a podcast. People can go listen to it. We'll do a 30 second diversion. I did a lot of work on this originally, and all the work said, this suit should not have been brought, but everyone who I talked to said, hey, deference to the government,

they've got hot dogs, I think they're going to, I think the government will win in court. And just the reporting I've seen, and I haven't been in the courtroom, so I don't know. But the reporting I've seen and what I'm feeling, and people can go look at Capri's stock price. Obviously, the market's starting to feel that little, too. There are some big holes in the government case. And that one doesn't mean they won't win because they've got hot dogs and antitrust is tough. And as I've learned with spirit, deference to the government is real in the antitrust cases,

even if Chevron's been overturned. But hot dogs, deference, it's tough. but there seems to be some real holes in there. I know you haven't been there. I'll give you 30 seconds if you want to add, change anything I just said. Well, your hot docs reminded me of an issue that we didn't touch on here with regard to Kroger Albertsons. And that's, there's a potential spoliation issue. So there were cell phones issued by Albertsons to all its employees.

And Susan Morris, the current president and others, they seem to have the auto-deliverts. leak feature on with regard to text messages. The culture of the company appeared to be very laxed with their text messages. The text messages that did survive seemed embarrassing. So, you know, they all say it's not intentional. It was an oversight. You know, we corrected it as soon, but text messages were lost. They're non-recoverable. If it, if it was, it was me and I was a judge, I would have an adverse inference on that. I should have asked you on this because I read it and I just

kind of put it in back in my mind because they were like, we're sorry it was automatic. So yeah, an adverse inference, that's a disaster for the defendant. It's not because I can't think of anything. I mean, they have skepticism on the merger. There's

there's a. text that say, oh, this will never, the government would never let us go through because we compete with them. that's about the worst that there could be. I think that there would have been things that would have been very embarrassing. And I don't know if they were intentionally destroyed or not. But I can't really think of even with an adverse inference of anything that you could really say would have been there on the Albertsin side, right?

If it was a destruction on the Kroger or the S&S side, I could imagine, you know, horrible stuff. Yep. But, you know, I don't think that it's devastating to the case if there's an adverse person. I do hear you, but, and I hate, last time I'm bringing back to spirit and last thing, because I'm going to have to go take care of the kiddo in a second. But, you know, one thing that people told me that I think I might have underplayed in spirit was, hey, the defendant's spirit, the first thing they let off with when JetBlue tried to buy them was this is an antitrust issue. clearly we can't be bought because of antitrust issues and i think they did a good job during trial explaining that away and you know it was not lawyers saying that that was a shareholder defense but if you take adverse inference on alberts inside and i'm just parallel matching you know the

the seller saying hey this is a big antitrust issue we think croger will have too much market power if they buy us and the government's going to have a problem with that if i adverse inference that it does seem like it's a problem and then on cross-examination by the defense they simply say Was that comment made before there was 559 divestiture stores? Yes. Would you have made that comment had you known that all areas of overlap would be divested? No. Did they ask that on call?

Yeah. Yeah, it didn't have it. And it shorted up. Cool. Mike, this has been great. Again, I tell everybody, if you're into legal situations, you've got to have Mike in the courtroom. You've got to get the emails. I think you might be the person I read the most.

amount of verbiage from. But this has been great. I've really enjoyed you. I really appreciate you coming on. I enjoyed having these pods. And look, we keep saying it's the trial of the century. We'll have another trial of the century next year. So we'll get it. We'll get a couple more. Mike, thanks are coming on. Anybody can reach out. I'll connect you with Mike. Got interest in it. But I appreciate him. We'll chat soon. Appreciate it. Thank you, Andrew. A quick disclaimer. Nothing on this podcast should be considered an investment advice. Guests or the host may have positions in any of the stocks mentioned during in this podcast. Please do your own work and consult a financial advisor. Thanks.