BRUSSELS — Delhaize here has long sought the benefits of sharing operational expertise between its European and U.S. supermarket holdings, and now it appears to be getting closer to sharing the two divisions' debt obligations as well.
In a conference call this month discussing the company's financial results for the fourth quarter and fiscal year, Delhaize said it is pursuing the opportunity to cross-guarantee its debt across the two divisions, which would enable it to take advantage of fluctuations in currency valuations, interest rates and tax benefits, analysts said.
The move would allow the company to receive a credit rating based on all of its assets, rather than just on its Delhaize America division, which includes the Hannaford Bros., Food Lion and Sweetbay/Kash 'n Karry chains.
“Right now, the only credit rating inside the group is on Delhaize America, and it was a credit rating that was originally taken before the bonds were issued that financed the Hannaford acquisition [in the 1990s],” said Craig Owens, chief financial officer, in response to an analyst's question. “Putting cross-guarantees in place is something we have talked about ever since really shortly after the share exchange transaction that really integrated the group into a single equity. Because it's a step that will integrate the group into a single credit, and we feel like the time is right now to go ahead and execute against that and to give ourselves the opportunity to issue debt on either side of the Atlantic in a more flexible way than we currently can.”
Cross-guaranteeing the company's debt also opens up the likelihood that the company will refinance its existing debt under more favorable terms.
“Cross-guarantees open up the flexibility for us to do a lot of different things, but clearly if we wanted to do some refinancing in the future, or issue debt for any other reason, it just gives us a whole lot more flexible platform from which to do that. It opens up opportunities that we didn't have before,” Owens said. “The fact that we can then choose more flexibly which jurisdiction and which entity that we issue debt from, gives us tax structuring opportunities.”
The introduction of cross-guarantees of the company's debt obligations is contingent upon receiving a debt rating for the European business that is at least as good at the rating on the Delhaize America debt, Owens said.
In the last year, Delhaize cut its debt to about $3.46 billion, a reduction of about $400 million from the levels at the end of 2005, for a debt-to-equity ratio of 74%.
Ratings agency Standard & Poor's, New York, said earlier this month that it had revised its outlook on Delhaize from stable to positive, citing recent operating trends at the company. It also said Delhaize's debt-protection measures “were beginning to approach levels that are characteristic of investment grade,” and that it could raise its current rating.
In the conference call, Delhaize also discussed its previously disclosed plans to expand its private-label offering in the U.S., with a three-tier program offering “good,” “better” and “best” levels of quality.
“We are also working on private-label lines for specific categories, such as organic and natural products,” said Pierre-Olivier Beckers, chief executive officer at Delhaize.
The company's recent efforts at promoting private label in the U.S. have helped drive increased sales of those products, the company said.
Asked about changes in consumer spending among low-income shoppers as a result of recent problems in the subprime consumer home lending market, Rick Anicetti, CEO of Food Lion, said the chain has not seen any evidence of trading down, other than the increase in private-label sales.
“About the only change in consumer behavior that we could detect is recently a greater penetration in private label, in particular at Food Lion, but as we explore that further, we clearly see it as a result of our efforts and refocus in that particular area, not a really sort of change as a result of any kind of economic factor,” he said.
The expansion of private label is being facilitated by the creation of a new cross-banner product assortment task force at Delhaize that was formed to identify opportunities for future growth in the areas of convenience, international foods, organic and natural products, health and wellness and private label.
In the area of natural products, the company continued to expand the number of stores with dedicated sections for those offerings, finishing last year with 111 Nature's Place sections in Hannaford Bros., up 35 from year-end 2005; 235 at Food Lion, an increase of 71; and 44 at Sweetbay. The sections range from 1,500 SKUs at Food Lion to more than 3,000 at Hannaford and Sweetbay.
The company also continued to add international food sections at Food Lion, finishing the year with 1,100 sections targeting Hispanic consumers, 500 Asian food sections and 170 sections dedicated to Indian food offerings.
In response to an analyst's question, Beckers noted that the company has seen more aggressive competitive activity in Florida, where it operates the Sweetbay/Kash 'n Karry chain, from both Albertsons and Winn-Dixie.
