ZAANDAM, Netherlands -- Ahold here last week said it plans to acquire Pathmark Stores, Carteret, N.J., in a deal that tightens the global retailer's grip on the East Coast of the United States.
The transaction would build critical mass for the Dutch-based company in the key markets of metro New York and Philadelphia and widen the reach of the Pathmark franchise. After acquiring Pathmark's 132 stores Ahold plans to fold the more than 70 Edwards Super Food Stores units in New Jersey, New York City and Long Island into the Pathmark operation, including a shift to the Pathmark banner.
The proposed deal was seen by financial analysts as mutually beneficial. Ahold, which posted U.S. sales of $16.2 billion in 1998, would improve on its economies of scale while Pathmark, with estimated 1998 sales of $3.7 billion, would gain a stronger financial footing. Pathmark has been constrained by high debt levels rooted in a leveraged buyout in 1987. Ahold would pay about $1.75 billion for full control of Pathmark, with most of that figure representing assumption of debt.
Bob Tobin, president and chief executive officer of Ahold USA, who gave SN a telephone interview from the Netherlands, said a big draw was Pathmark's management, including James Donald, president, chairman and CEO. "Jim Donald has done a lot since he got there," Tobin said. "They have a strong team. They will stay on with us. That's a huge hurdle overcome."
Donald joined Pathmark in October 1996 following a career that included top executive posts at Albertson's, Wal-Mart Supercenters and Safeway.
Tobin said the big opportunity is to achieve Pathmark's promise, including faster growth and the further expansion of fresh-foods merchandising within Pathmark's superstores. "Most of their constraints were due to financial issues since the LBO deprived them of the ability to re-invest. So we'll give them the ability to grow and modernize," Tobin said.
Tobin said Pathmark has a powerful franchise, excelling at urban merchandising and operating advanced general-merchandise and pharmacy departments. "They have a terrific reputation with customers in the market," he stressed.
He said the decision to eliminate the Edwards name was made after long consideration. "We've done our homework on consumer attitudes in the market," he said. "The Pathmark name has more equity."
Tobin declined to speculate on whether the Federal Trade Commission would require the sale of a large number of stores before approving the deal. However, analysts said the market wasn't at the level of high concentration in most communities that would trigger such an FTC reaction. Ahold said Pathmark's market share in the metro New York area is approximately 12%.
Pathmark's Donald said the retailer is "excited about the opportunity to benefit from Ahold's economies of scale and synergy benefits to step up our services in the local communities and improve the company's results." He said Pathmark has significantly improved operations in the past two years, but stressed the retailer would be far more competitive by teaming with the global retailer.
Harvey Gutman, Pathmark's senior vice president for retail development, told SN the retailer is experimenting with shrinking the size of its present format, which has been dubbed Pathmark 2000. The retailer is shrinking the box from 50,000 square feet to 30,000 to 35,000 square feet for two stores, one under construction in Sheepshead Bay, Brooklyn, and a second soon to be built in Flushing, Queens.
The Pathmark acquisition is subject to review by regulatory agencies. Ahold expects to have the approvals in the second half of 1999 and to complete the deal shortly after, the company said. Ahold also said the deal requires 66 2/3% of the preferred shares be tendered in the offer.
A powerful benefit of the arrangement is expected costs savings of $30 million for the combined organization in the first year, increasing to $50 million in the second year, Ahold said. The company added it would immediately redeem all debt obligations once it has taken control of Pathmark.
Ahold would operate Pathmark as its sixth U.S. stand-alone operating company. The others are Stop & Shop with stores in Connecticut and Massachusetts; Giant-Landover in the Washington and Baltimore metropolitan areas; Giant-Carlisle (which currently includes the Edwards division) in Pennsylvania; Tops Markets in western New York state; and Bi-Lo in the Carolinas.
Ahold would pay $250 million for preferred and common stock and assume $1.5 billion in debt. The majority owner of Pathmark is Merrill Lynch, New York.
In a conference call for financial analysts that was closed to the press, Ahold said Edwards recently has been undergoing a change from everyday low price to high-low, which is also the pricing direction at Pathmark, according to Gary Giblen, managing director of NationsBanc Montgomery Securities, New York. The high-low pricing strategy is more typical of these stores' competitors in the New York area, which is a highly promotional market.
Ahold's global reach includes supermarkets and hypermarkets in The Netherlands and other European countries including Portugal, Spain, the Czech Republic and Poland. Ahold also has operations in Latin America and the Asia Pacific region. The company operates more than 3,600 supermarkets, hypermarkets and specialty stores worldwide, with 1998 sales of more than $30 billion. ....
Ted Bernstein, an analyst with Grantchester Securities, New York, a division of Wasserstein Perella Securities, said the transaction, at 8.2 times earnings before interest, taxes, depreciation and amortization, is a "great deal for Ahold, wrapping up continuous geography from northern Virginia through Boston." Bernstein had recently published a report on Pathmark, estimating that an acquisition would go for about nine to 10 times EBITDA.
"Under Jim Donald, Pathmark has proven it has the wherewithal to compete and has done a good job," Bernstein said. "Jim deserves kudos. He has excellent supermarket experience, is a merchandiser and has a vision for the chain."
While the FTC will examine the deal, it probably won't require heavy store divestitures, Bernstein said. "There may be a few stores here and there, but it won't be significant," he said. "In any given community the market is still fragmented enough."
Giblen said the Pathmark transaction would be a good deal for Ahold, which wasn't expected to make its next acquisition so soon. He explained that Ahold has been busy integrating Giant of Landover, which was acquired last October, and has faced economic challenges in some international markets, all of which could have delayed another acquisition. "But it's still a positive move for them," he said.
"Better buying power was the No. 1 motivation," Giblen said. "It also gives them a way to reposition Edwards, which wasn't a star performer." He said Ahold plans to spend $500,000 per store to spruce up Pathmark and Edwards units.
Giblen said that Pathmark's real estate is a key benefit for Ahold. "I've always thought that Pathmark had a lot of latent strength," he said. "They have locations in built-up areas of New Jersey where it is impossible to build a store anymore. They are good at inner-city and urban locations."
Ahold last week also reported 1998 fiscal year results, noting net earnings surged on the strength of further growth in the United States, including the Giant acquisition. Sales in the United States rose 13% for the year to $16.2 billion from $14.3 billion, with all operating companies contributing to the increase. In particular, Stop & Shop and Giant-Carlisle notably increased sales. U.S. operating results rose 24% to $713.5 million from $574.2 million.
In the fourth quarter, U.S. sales rose 41% to $4.8 billion from $3.4 billion. The Giant acquisition was the main reason for the surge in sales, while the other four operating companies also contributed. Fourth-quarter U.S. operating results rose 48% to $221.3 million from $149.2 million.
Ahold also announced the consolidation of its five U.S. operating companies' accounting departments into a single financial service center.
4TH-QUARTER RESULTS
Qtr Ended 1/3/99 12/28/97
Sales $8.9 billion $6.4 billion
Change + 39%
Net Income $204.8 million $142.6 million
Change + 43.6%
52 Weeks 19981 1997
Sales $29.5 billion .... $25.9 billion
Change + 13.9%
Net Income $609 million $478.9 million
Change + 27.2%
NOTE: Figures are for Ahold's worlwide business in U.S. dollars. The exchange rates of Dutch guilders to the dollar are as follows: 1.88 for the fourth quarter of 1998 and 1.98 for the year, and 1.98 for the fourth quarter of 1997 and 1.95 for the year.
