QUINCY, Mass. -- Ahold, Zaandam, Netherlands, agreed to acquire Stop & Shop Cos. here last week in a move that surprised the supermarket industry and underlined the Dutch firm's determination to markedly increase its U.S. presence.
For the $2.9 billion price tag, which would reportedly be Ahold's biggest purchase ever and which is considered a high multiple by analysts, Ahold would become the sixth largest U.S. supermarket company, with sales of $12.4 billion on a pro forma basis, including $4.1 billion for Stop & Shop. (The latter chain posted an operating profit of $226 million and cash flow of $326 million.)
The arrangement means Ahold, a large food retailer with global volume of $22.1 billion, would pick up a sixth U.S. chain and achieve far greater critical mass along the East Coast, where it operates stores from New England to the Carolinas. Still to be determined are whether Ahold could hold onto all stores in areas of overlap with current Stop & Shop stores and whether Stop & Shop's strategies, particularly in New Jersey and on Long Island, would change as a result of the merger.
The deal would mark the exit of Kohlberg Kravis Roberts & Co., New York, from ownership of Stop & Shop. KKR acquired Stop & Shop in a leveraged buyout in 1988, and owns about 62% of its equity. The transaction would be highly unusual
in that it would mark the first time KKR entirely sold one of its supermarket holdings, noted Gary Giblen, managing director for Smith Barney, New York. Typically KKR confines itself to occasional secondary offerings.
The deal apparently happened very quickly. A few weeks ago Ahold approached KKR with a proposal and KKR determined Ahold was serious and then introduced the Ahold people to Stop & Shop management. The deal was then worked out by the three parties. KKR's Stop & Shop shares are valued at $1 billion in the deal, said Clifton Robbins, KKR general partner, in a statement.
"This move was a big surprise," said Meredith Adler, managing director at Chemical Securities, New York. "With this deal Ahold has said it will consolidate the Northeast. They're not done, but they'll do that and do it with top quality players."
In an interview with SN, Cees van der Hoeven, Ahold's president and chief executive officer, said the merger doesn't mean Ahold is through with U.S. acquisitions. However, because most of the company's U.S. holdings are on the East Coast, Ahold is keeping its growth focus on that area, he said.
"We are continuing to look at propositions or opportunities that present themselves and fill in market share on the East Coast, as we are doing with the rest of the world. The East Coast at the time being is a big bite for us. Therefore, we have no current ambitions to go beyond that."
Ahold expressed strong satisfaction with the Stop & Shop operation and its current management, headed by Robert Tobin, chairman, president and chief executive officer, and William Grize, executive vice president and chief operating officer. The deal is "a long-held wish come true," said Robert Zwartendijk, Ahold USA president and chief executive officer, in a statement. Ahold USA is based in Parsippany, N.J., but is moving to Atlanta in order to be in a more convenient transportation location. "Strategically, this is a natural fit and offers tremendous opportunities benefiting our customers and other stakeholders," Zwartendijk said. "Managed by an outstanding team, Stop & Shop will continue to operate independently with its own identity."
Van der Hoeven told SN, "Bob Zwartendijk is running the U.S. operations with CEOs in a coordinated effort amongst the chains. There's a sense of belonging to one family. We'll welcome Bob Tobin and Bill Grize to join us in these efforts.
Tobin, in a statement, said the deal "is one of the best things that could happen to us. Becoming part of this international group of supermarket companies will further strengthen our growth prospects and our ability to serve our customers."
Stop & Shop operates 116 superstores, 43 Stop & Shop supermarkets, 28 Purity supermarkets, 17 Melmarkets supermarkets and 64 Li'l Peach convenience stores. In 1995 the company had net earnings of $68 million. Ahold has operations in the United States, in the Netherlands and in various other European countries, and recently announced expansion into Southeast Asia. The company began its U.S. supermarket operations in 1977. Its five chains are Tops Markets, Buffalo, N.Y.; Bi-Lo, Mauldin, S.C.; Edwards Super Food Stores, Windsor Locks, Conn.; Finast, Maple Heights, Ohio, and Giant Food Stores, Carlisle, Pa.
Under last week's merger arrangement, Ahold and Stop & Shop signed a definitive agreement for Ahold to acquire all the outstanding shares of Stop & Shop stock. Ahold is to begin a tender offer April 3 for all outstanding Stop & Shop shares for a price of $33.50 in cash per share. Stop & Shop's majority shareholders, investment partnerships controlled by KKR, have agreed to tender a 62% ownership. The acquisition is subject to antitrust approvals and other customary conditions. In the event that the antitrust approvals are not obtained by July 31, the price would be increased to $34.50 a share. The acquisition would be financed by a bridge loan from a bank consortium. Bonnie Zwickel, an analyst at CS First Boston, New York, said Stop & Shop shareholders are receiving a good deal. "They'll get a 25% premium on the share price," she said. "Ahold buys good managements and Stop & Shop's are among the best in the industry. Hopefully, the current Stop & Shop management will continue on."
Chemical Securities' Adler said the merger was driven partly by Ahold's desire for market share concentration.
"Since there is overlap between Stop & Shop and Edwards, the message is they'll pay handsomely for market share dominance. They are paying nicely for it but getting a premiere property. They'll have to wait and see about the Federal Trade Commission's decision on stores in Connecticut and Rhode Island."
Adler also noted the deal would give Ahold a better position on Long Island, where it operates Edwards stores and Stop & Shop just acquired Foodtown units.
Smith Barney's Giblen said the deal was a surprise for a number of reasons, including: "Stop & Shop has been aggressively making acquisitions and positioning itself as a consolidator, not a consolidatee. Ahold has never before made an acquisition of this magnitude either in the United States or internationally."
Giblen indicated the deal may have been driven by KKR portfolio management considerations.
Moving Up the Chain
Here is how the top 10 U.S. food retailers will rank once the Ahold-Stop & Shop deal is completed. Sales are for the companies' most recent fiscal year.