Ahold Earmarks USF Sale Proceeds

JON SPRINGER

AMSTERDAM — U.S. Foodservice, the subsidiary at the root of so many of Ahold's problems, may now be part of the solution.

Ahold said it will sell the Columbia, Md.-based company to a consortium led by private equity funds Clayton, Dubilier Rice and Kohlberg Kravis Roberts for $7.1 billion. The retailer will use proceeds to pay down more than $2.7 billion in debt, while returning another $4 billion to shareholders in the form of company share buybacks, said Anders Moberg, Ahold's outgoing chief executive officer, speaking at the company's annual meeting here.

U.S. Foodservice was the source of the accounting scandal in 2003 that nearly brought down Ahold and left it awash in debt. The $7.1 billion sale price strongly exceeded the estimates of some analysts, who had previously said Ahold could probably expect to get a little more than $5 billion.

“They definitely fetched a good price,” Mitch Corwin, an analyst at Morningstar, Chicago, told SN, adding that the price valued USF at a 30% premium to food-service peers Sysco and Performance Food Group.

“There were many who wanted us to sell U.S. Foodservice in 2003,” Moberg said in a speech at the annual meeting. “I said then it would be a mistake at that time and would destroy shareholder value. Instead we focused on rebuilding the U.S. Foodservice business and culture.”

Ratings agencies Standard & Poor's and Fitch Ratings each last week raised their debt ratings of Ahold, with S&P taking its ratings back to investment grade for the first time since the scandal of 2003. Ahold's stock price also soared to levels not seen in the four-plus years since the USF scandal.

Accompanying Ahold in the stock jump was Belgian retailer Delhaize, which in recent months had been discussed as a potential partner of Ahold, should Ahold decide to sell supermarket assets in the U.S. or in Europe. Observers last week said the sale of USF would not necessarily influence the likelihood of a merger, and attributed the activity to the news that Moberg will resign in July.

While the USF sale and subsequent stock buyback ought to be welcome events for Ahold shareholders, observers said they don't expect dissident investors to stop calling for Ahold to sell U.S. chains Giant, Stop & Shop and Giant-Carlisle.

“The buyback is certainly a significant step in providing a lot of cash back into the business, but the fundamental issues they face are still there,” Neil Stern, senior partner at McMillan Doolittle, Chicago, told SN. “The international network they run is still large and unwieldy and still has performance issues at some divisions.”

Stern said he believes Ahold waited for the right moment to sell USF. Ahold acquired the company, then doing around $7 billion in sales, for $3.6 billion in 2000. USF reported $19.6 billion in revenues for fiscal 2006. A merger with Delhaize is a possibility, he added, but “very difficult to put together” due to regulatory issues.

“U.S. Foodservice has done an admirable job turning itself around after the problems they had. The business was pretty healthy, and the fundamentals of the food-service business still look pretty good, with lots of room to grow due to its fragmented market,” Stern said.

USF became the center of controversy after it was revealed that executives were inflating promotional rebates from suppliers in order to meet earnings targets. Ahold was forced to restate $800 million in earnings as a result. Ahold rebuilt the business behind Larry Benjamin, who was named chief operating officer of Ahold's U.S. supermarkets last fall.