According to Fitch Ratings, a simplification on Dutch retailer Royal Ahold’s structure is a prerequisite for any potential merger while, the ratings agency said, the disposal of US Foodservice would have a positive impact on the overall business.
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It is rumoured that the world’s fourth largest retailer is in talks regarding a merger with Belgian supermarket group Delhaize. If this were to go ahead, it has been speculated that Ahold’s US Foodservice business could be sold to fund an extraordinary dividend for Ahold shareholders. Both groups have remained silent on the rumours. Ahold has also been under increasing pressure from activist investors Paulson and Centuras to increase value by selling off its US operations.
“A merger of the two retail activities will make sense from a geographical point of view but challenges will remain and a simplification of Ahold’s complex group and operational structure is still required,” says Johnny Da Silva, director in Fitch’s European RLCP team.
Ahold management has long saught to simplify activities under its ‘road to recovery’ programme, which aims to deleverage and strengthen its US retail and foodservice operations. Ahold has also followed a disposal programme, which has helped to reduce group debt to EUR5.9bn (US$7.48bn) in 2005.
At EUR13bn, Ahold’s market capitalisation is twice that of Delhaize’s, which is EUR6.4bn. Likewise, Ahold’s sales are considerably stronger at EUR44.4bn compared to EUR18.6bn. However, 2005 operating profits both sat at around EUR1bn.
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By GlobalDataAccording to Fitch, a merger between the companies would be a good geographical match. In the US, as Delhaize primarily operates in the south east while Ahold is a major player in the north east, while in Europe, the combined group’s presence in the Benelux will be enhanced. The merger would create a company with total retail sales of EUR48.8bn, of which EUR32bn would be generated in the US.
However, Fitch warned of integration rises as under-investment and rising costs in the US have proven challenging to Ahold’s operations, causing the retailer to cut its operating target for FY2006 from 5% to 4-4.5%.
Fitch also expects further rationalisation of Ahold’s portfolio on a stand-alone basis. Central European operations (including Poland, Czech Republic and Slovakia) and, in the US, Tops stores are “under review”. Ahold’s ICA and JMR stakes could also be considered for disposal, the ratings agency said.
Fitch said that investor pressure could cause Ahold to dispose of US Foodservice, valued at approximately US$5bn, commenting: “Fitch takes a positive view of such a disposal, whose cash proceeds can be allocated to debt reduction. Even if proceeds are used to pay a special dividend to shareholders, at least the overall business should become more focused and manageable.”
