Industry Deal Talk Heats Up

MARK HAMSTRA

Speculation about potential mergers among some of the food retail industry's larger players arose last week after a year in which such buying and selling activity had virtually ground to a halt.

According to one report, a spokesman for Tengelmann Group, A&P's largest shareholder, said A&P would consider a merger with a competitor “in the medium term.” Karl-Erivan Haub, chief executive officer of Germany-based Tengelmann, added that the investor would consider maintaining a reduced stake in a merged company, the report said. Officials at A&P could not be reached for comment on the report, which appeared in the Wall Street Journal.

Separately, two European analysts suggested that Ahold, the Amsterdam-based parent of U.S. chains Stop & Shop, Giant of Landover and Giant of Carlisle, was a ripe target for acquisition, in part because of its low share price — and that British retail giant Tesco should consider buying it.

“The combination of a substantial discount, leading and defensible market shares, best-in-class internal growth rates, strong brand names, strong cash generation and a sound balance sheet, make Ahold a prime target, in our view,” wrote Peter Brockwell and John David Roeg of ING Wholesale Banking, in a report issued last week.

They noted that the idea of Tesco buying Ahold was pure conjecture on their part, based on analyzing possible future growth opportunities for both companies. Tesco, they said, is better equipped to pull off an acquisition of Ahold than is Delhaize Group, the Brussels-based parent of Food Lion, Hannaford Bros. and Sweetbay that has previously been posited as a possible Ahold buyer.

They also noted that it could be years before Tesco's Fresh & Easy operation in the U.S. breaks even, but buying Ahold would give it immediate critical mass in the U.S., along with a “high-quality management team.”

“Ahold could be viewed as a one-off opportunity to acquire an undervalued asset at a low point in the U.S. consumer cycle,” they wrote.

“There's always talk of acquisitions when stock prices are beaten down,” said Chuck Cerankosky, an analyst with Northcoast Research, Cleveland, who said he expects most acquisition activity will continue to center around distressed assets in the near term, as exemplified by the recent offer by Delhaize to acquire Bi-Lo.

“I think that type of deal is much more likely to occur, and it is typified by the target company languishing, bleeding sales, going into bankruptcy and maybe even going dark before buyers appear,” he said. “They pick specific stores or groups of stores and pay less than replacement costs.”

Meanwhile, Ahold itself could be gearing up for some acquisitions of its own, the company said last week (see Page 6).

“In the last several years, Ahold has moved from being highly leveraged to being able to go after market share with a much stronger balance sheet,” Cerankosky said. “Maybe it wants to fill in some of its geography. It could be reverting back to its historical role of being a consolidator.”