Tuesday, March 31, 2009

Retail Memo: The 'Legal Times' Offers A Legal Legacy of the FTC-Whole Foods' Settlement Agreement; We Offer an Antitrust Case Blast From the Past

FTC v. Whole Foods Market, Inc. - Post Mortem

As regular readers of Natural~Specialty Foods Memo (NSFM) are aware, we've been reporting on and offering extensive analysis about the U.S. Federal Trade Commission (FTC) v. Whole Foods antitrust case, which ended on March 6, 2009 in a mutual settlement agreement signed off on by both the FTC and Whole Foods Market, Inc. [Regular and less than regular readers alike can click here to view a recent bibliography of our FTC v. Whole Foods Market, Inc. coverage.]

Potential FTC-Whole Foods settlement legal legacy

In today's Legal Times, a professional legal trade journal, writer Jenna Green has an interesting piece about the potential legal legacy of the FTC-Whole Foods Market, Inc. antitrust settlement, in which the FTC dropped its nearly two year attempt to overturn the 2007 acquisition of then Wild Oats Markets Inc. by Whole Foods, in return for Whole Foods Market, Inc. (the combined Whole Foods-Wild Oats) agreeing on March 6, 2009 to sell 13 current operating stores, 19 closed stores, and the Wild Oats brand and related intellectual property.

As we've written, the agreement is much ado about nothing, as the net result of it actually is to only force Whole Foods to sell the 13 existing operating stores.

The 19 closed stores are...well, already closed. Many were already on the market for sale prior to the March 6 settlement agreement.

And Whole Foods has essentially killed the Wild Oats brand since acquiring the company in 2007. Therefore, selling the brand and its related intellectual property, assuming a buyer even emerges, won't materially hurt Whole Foods, except that the natural grocery chain would most likely prefer to see the brand die rather than possibly get brought back to life by another food retailer.

But the Legal Times piece offers a look at the settlement agreement from more of an antitrust legal precedent perspective in that it suggests the divestiture agreement (selling the stores) between the FTC and Whole Foods could set an example for future deals.

Such agreements between government regulators and merging and acquiring food retailing chains aren't really new however.

An antitrust blast from the past: The American Stores - Lucky merger

For example, in a major case in California in the late 1980's, then state Attorney General John Van de Kamp held-up the post-acquisition integration of the Lucky Stores supermarket chain by then Salt Lake City, Utah-based American Stores Company (which was later acquired by then Boise, Idaho-based Albertsons, Inc., which was later acquired by Supervalu, Inc. and private equity firm Cerebus) until American Stores agreed to divest a number of its existing Alpha Beta and acquired Lucky stores in the state.

American Stores was at the time the third-largest supermarket chain in the U.S., after Kroger and Safeway.

A brief history: Right after the deal was announced, Van de Kamp asked the Federal Trade Commission to void it, claiming that a combined (over 400 stores in California) Lucky-Alpha Beta would cost California consumers $400 million by reducing competition. The FTC refused to void the deal, although it did force the divestiture of 37 Alpha Beta stores, which were sold in December 1988, the same month 38 Lucky stores in Arizona were also sold.

Van de Kamp then took his case to court, and on September 29, a federal judge in Los Angeles issued a preliminary injunction against the merger. American Stores appealed, and in April 1989, an appeals court judge in San Francisco overturned the injunction. Van de Kamp appealed this reversal to the U.S. Supreme Court.

In April, 1990 the U.S. Supreme Court ruled in favor of the California attorney general. Subsequently, and wishing to avoid additional, lengthy litigation, American Stores reached an agreement with Van de Kamp, whereby the company was allowed to convert 14 Alpha Beta stores to the Lucky name, but also had to sell--within five years--161 southern California stores -- 152 Alpha Beta markets and nine Lucky supermarkets.

Sound familiar? The difference though was that in the American Stores case there were real antitrust results in our analysis because (1) the combined Lucky-Alpha Beta stores gave American Stores Company too much of a supermarket concentration in California; and (2) the stores were supermarkets, where the majority of shoppers, especially in the late 1980's, bought there food.

The concentration therefore didn't offer consumers enough competitive choice in the market (California), although despite the merger there still was quite a bit of competition, mostly from Safeway and numerous regional chains and independents.

At the time, Lucky was the number two market share leader in Northern California, after Safeway. Alpha Beta was number two. The deal put the combined Alpha Beta and Safeway about tied for number one in Northern California, eliminating an independent number two, Lucky.

The combined Lucky and Alpha Beta placed as the number two market share leader in Southern California. Vons and Ralphs were prior to that numbers one and two. Lucky a very strong number three. Alpha Beta number four. The deal eliminated a strong, independent number three, Lucky.

We essentially agree with the U.S. Supreme Court and the California Attorney General on the merits of the American Stores-Lucky merger, although we would have been a bit less harsh on the number of stores the company was ultimately forced to sell. It was too many.

After the multi-year legal challenge and resulting store sell-off, American Stores never was able to get its footing back as a supermarket chain, despite its increased size. It eventually sold the company to then Boise, Idaho-based Albertsons, Inc., which also went away a couple years ago when Supervalu, Inc. and the private equity form Cerebus acquired it.

In an ironic twist, Cerebus bought what was then Albertsons' Northern California division in the Albertsons, Inc acquisition with Supervalu, Inc., which included all of the former Lucky banner supermarkets in that part of California. Albertsons had long before changed the name of the former Lucky stores to Albertsons. In 2007 Cerebus sold the division to Modesto, California-based Save Mart supermarkets. After operating the about 200 Northern California Albertsons stores for a number of months, Save Mart decided that rather than rebrand them as "Save Mart," which it originally planned to do, it would rebrand the Albertsons banner stores back to the old Lucky name, which is the banner they fly under today.

Whole Foods on the other hand is a niche retailer. And as we've argued, a combined Whole Foods-Wild Oats never presented any anti-competitive threat in 2007, or today.

Below (in italics) is the first part of the piece in today's Legal Times by Ms. Greene. After the text, just click the link to read the full story.

Having covered and written about FTC v. Whole Foods Market, Inc. extensively since the deal was announced in the summer of 2007 -- and still doing so in what we are calling our "post mortem pieces -- Natural!~Specialty Foods Memo (NSFM) suggests reading Ms. Greene's piece, as she does an excellent job detailing the antitrust legacy post settlement.

Whole Foods-Wild Oats Deal Leaves Controversial Legacy
By Jenna Greene
Legal Times
March 31, 2009

As corporate mergers go, the purchase of natural foods grocer Wild Oats by its rival Whole Foods Market looked like small potatoes (organic yellow fingerling, perhaps). Nobody expected the proposed $565 million acquisition to spark a food fight of epic proportions.

But on March 6 -- after two years, $28 million in legal fees and expenses, and dozens of lawyers -- Whole Foods cut a deal to end the battle. And the Federal Trade Commission carved another notch in its reputation for aggressive antitrust enforcement.

The most important result of the battle may be a controversial opinion out of the U.S. Court of Appeals for the D.C. Circuit that some fear will make it too easy for the FTC to effectively block future mergers. As one antitrust expert says, "so long as their lawyers don't get up there and fall asleep at the podium," the FTC wins. Less than a week after Whole Foods and the FTC settled, a $1.4 billion merger collapsed in part due to the D.C. Circuit opinion.

As for the dispute over merging grocery chains, it's not clear who actually won. The FTC, which snatched significant concessions from the jaws of initial defeat, asserts it came out on top. "Obviously, [the settlement] wasn't the maximum relief we could have obtained," says David Wales Jr., acting head of the FTC's Bureau of Competition, discussing the case at length for the first time. "But we feel it substantially restores competition and did so a lot sooner than if we had continued to litigate."

Whole Foods points out that the merger survived; it wasn't forced to unscramble all the eggs. "It was a settlement -- nobody got what they wanted," says lead lawyer Paul Denis, a partner in Dechert's D.C. office. "If everybody leaves unhappy, you must have gotten it right."

Still, agreeing to divestitures in the face of an antitrust agency's opposition looks a lot like business as usual. Why did Whole Foods spend so much money to reach that settlement? In retrospect, the company may have been too determined to go toe to toe with the FTC -- and caught off-guard by the FTC's similarly battle-ready approach.


When the merger between the two grocery chains was announced on Feb. 21, 2007, analysts' reaction was largely positive. UBS called it "a slam dunk," while Morningstar said it was "strategically and financially sound." No one, it seems, had any inkling of the antitrust train wreck ahead. Standard & Poor's was lukewarm on the deal for the opposite reason: The stores faced "increased competition from traditional grocers."

Whole Foods, which is based in Austin, Texas, didn't even start off with specialized antitrust counsel -- it used its M&A lawyer, Bruce Hallett of Dallas' Hallett & Perrin, to submit the required pre-merger notification, a 15-page form with information about each company's business. Whole Foods, with 194 stores, would buy Boulder, Colo.-based Wild Oats, which owned 110 stores total, 74 of them under the Wild Oats brand, for $18.50 per share of stock. The two chains were prime competitors in just 22 markets.

While the FTC and the Justice Department's Antitrust Division sometimes fight over which agency will review a merger for its potential effects on competition, supermarket mergers have always gone to the FTC.
"In the overwhelming majority of cases, it makes absolutely no difference which agency reviews a merger," says Ronald Wick, an antitrust partner at Baker Hostetler not involved in the case.

But as Whole Foods would soon discover, sometimes differences in the two agencies' statutory authority can prove crucial.

The filing was routed to the FTC Mergers IV group, which specializes in retail sector transactions. The deal, Wales says, "quickly jumped out as having potential overlap, potential competitive significance." A partner at Cadwalader, Wickersham & Taft before joining the FTC in 2006, Wales, 39, has been acting director of the Bureau of Competition since Jeffrey Schmidt left in August 2008.

A team quickly took shape. Mergers IV lawyers led by Assistant Director Matthew Reilly began gathering information, talking to the parties, their competitors, and their customers. Less than three weeks later, on March 13, 2007, the agency issued a second request for documents. "It was not a close call," Wales says.

Even before the second request was officially made, Whole Foods got the hint that trouble loomed. But in seeking experienced counsel, it still looked for a familiar firm. The company turned to antitrust lawyer Neil Imus and commercial litigator Alden Atkins, partners in the D.C. office of Houston-based Vinson & Elkins. Atkins had previously handled litigation for Whole Foods involving a store in Washington, D.C. Although Whole Foods would run the litigation, Wild Oats retained Clifford Aronson of New York's Skadden, Arps, Slate, Meagher & Flom.

If settlement with the FTC was desirable or even possible at that point, Whole Foods' lawyers had little time to explore the option. They were too busy fulfilling the second request. The companies turned over 16.5 million pages of material, one of the largest document productions in recent agency history. While once this would have meant 10,000 boxes stacked in a conference room, the data largely came on hard drives -- along with a computer virus. ("Obviously we didn't think they did it on purpose," Wales says). Dozens of FTC staff lawyers began their review.

Then on June 6, 2007, the FTC filed suit in U.S. District Court for the District of Columbia seeking a preliminary injunction to halt the merger. All five commissioners -- three Republicans, one Democrat, and one independent -- voted in favor of bringing the case.

[Click here to read the full story from today's Legal Times.]

[You can follow Natural~Specialty Foods Memo on Twitter.com at www.twitter.com/nsfoodsmemo.]

No comments: