Krogbertsons?

October 17, 2022

More bad news out of the UK. Liz Truss sacrificed her finance minister Kwasi Kwarteng and ripped up her economic strategy over the weekend, but the sell-off in the gilt market indicated investors did not think this was enough. Probably the worst bit of news though was the death of Robbie Coltrane (Hagrid) on Friday. I’m not crying, you’re crying.

The lowdown

Flex your finance muscle 💪🏦 

We heard you in the poll and, in this new section, we look at a finance concept and offer you a primer. 

With the return of the down round, today we examine a dilution protection mechanism, sometimes used by VCs, known as a ratchet.

Ratchets

A ratchet is an anti-dilution provision that offers an investor protection against pricing the current round too high. In general, a ratchet operates by granting the investor additional equity if a subsequent round (or sale) is priced below the post-money valuation of the current round. The additional equity granted to the investor will depend on the specific ratchet provision.

It is thought that the recent inside-only, Series C round of Railsr (UK Fintech) may have been a down round, although the valuation was not disclosed. In this case, if any of the existing investors had been able to include a ratchet provision in the term sheet for the previous round, they would have enjoyed less dilution, at the expense of any investors without a similar provision.

Read more and a practical example here.

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Credit: Daniel Acker/Bloomberg

Kroger plans to buy supermarket rival Albertsons

Kroger has agreed to buy Albertsons in a deal worth $24.6 billion. This would combine the two largest grocery chains in the US and, because of this, will be looked at closely by competition regulators. In a clear attempt to address these concerns, Kroger said it would “reinvest approximately half a billion dollars of cost savings from synergies to reduce prices for customers”.

The regulators may have a point though. When Albertsons and Safeway sought to merge in 2015, the FTC required the companies to divest 168 stores to complete the deal. Less than a year later, the company that purchased the divested stores, filed for bankruptcy, and the now larger Albertsons bought 33 of them back. Current FTC Chair Lina Khan criticized this outcome in a Law Review article she co-wrote. Not a great sign for this deal.

It is little surprise, then, that the Albertsons’ share price is trading at $26.21 – well below the $34.10 offer price. To its credit, Kroger is so far doing a very good job at lowering prices, with the company’s own share price finishing down 7% on the news. Savings already!

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