Tops Divestment Takes Back Seat to Other Sales

MARK HAMSTRA

AMSTERDAM — Ahold has moved its Tops chain in upstate New York to the bottom of the asset-sales pecking order, according to officials at the company, based here.

In a conference call with analysts discussing Ahold's fourth-quarter results, John Rishton, executive vice president and chief financial officer, said the company may not be able to sell the Tops chain until the end of 2007 because it has been occupied with efforts to sell its Polish operations, its joint venture in Portugal and its U.S. Foodservice division.

“I think that one of the harsh realities we have had to face is that just announcing stuff doesn't mean it has happened,” Rishton said. “There is a huge amount of work that goes into any divestment or acquisition.

“We are getting on with Tops, but they just can't all happen together,” he said. “We just don't have the capabilities to make it all happen together.”

He also pointed out that Ahold is not “desperate for the cash” that would come from the sale of Tops, which operates about 68 stores in Pennsylvania and upstate New York, mostly in the Buffalo area.

“The issue here is, how do we get the best value from the divestments that we're making, and usually rushing to sell doesn't bring you the best value,” he said. “So we'll take our time.”

One retail real estate professional in the region, who asked not to be identified, said that so far interest from potential buyers seems to have been limited to a few individual Tops locations.

“I'm not hearing about anyone looking at all the stores in the Buffalo market, for example,” he said.

PURCHASE PROSPECTS

Potential buyers for some or all of the Tops locations, he said, include the same companies that have already acquired Tops stores in Ohio and eastern New York: C&S Wholesale Grocers, Price Chopper and Giant Eagle.

“Wegmans could also be interested in a few of the stores,” he added, and a private equity firm could also emerge as a bidder for the whole chain, possibly in partnership with former Tops executives.

Matthew Truman, a London-based analyst with Lehman Bros., projected that Ahold could fetch about $450 million for Tops, or seven times projected EBITDA for 2007. Sales at the chain are projected to be about $1.5 billion in 2007. Tops' same-store sales were down 5.5% in 2006.

“We value Tops at 0.3 times sales, given its higher exposure to onerous leases than its peer group,” Truman wrote in a report.

He estimated Ahold could obtain about $6 billion for U.S. Foodservice, the Columbia, Md.-based distributor that is expected to be sold in the coming months. Last week, reports said Ahold had invited food-service distributor Sysco Corp., Houston, to bid for the division. Other reports have indicated interest from private equity firms, including Bain Capital, Blackstone Group, Clayton, Dubilier & Rice and Kohlberg Kravis Roberts & Co.

Analysts increased their optimism about the prospects for Ahold to garner a good price on its divestments after the company said it would increase its share-repurchase program to about $4 billion, up from the previous plan of about $2.7 billion in share repurchases.

The news of the stock repurchase, combined with ongoing strong financial results at the company's Albert Heijn chain in the Netherlands and its retail operations in Scandinavia, helped propel a spike in Ahold's share price last week.

Ahold also said it was encouraged by the early results from its “value improvement program” (VIP) at its Stop & Shop and Giant-Landover chains in the U.S., although analysts said they were less clear on the positive impact of that initiative.

VIP, which has been adapted from a strategy that has produced strong results in the Netherlands, involves moving to an EDLP platform for most products, category by category, and reducing product selection to trim costs.

“The update on VIP in the U.S. did not increase our confidence on the timing and potential of its success,” said Patrick Roquas, an analyst with Rabo Securities here. “We perceive that volume growth has not picked up materially.”

Ahold officials in the conference call declined to provide details about the impact of the EDLP rollout on sales, citing the fact that the accompanying SKU reduction makes comparisons difficult.

The company has implemented the program in four categories: produce, paper, baby care and household products, altogether accounting for about 15% of sales volume at Stop & Shop and Giant-Landover. The company anticipates converting half of its product volume to VIP by the end of this year and 75% by the end of 2008.

In produce, which accounts for 10% of sales and was the first category to be converted to the program about six months ago, the company has reduced the number of SKUs by 30% and increased inventory turns by 15%. That has resulted in an increase in product freshness of about two days, Ahold said.

“It was clear that our prices were too high and that customers valued freshness ahead of variety,” said Anders Moberg, chief executive officer, Ahold, in the conference call.

Lawrence Benjamin, chief operating officer, Ahold USA, said the company measures its success using customer satisfaction scores, and has been encouraged by the results.

“We have seen improvements in both pricing perception for produce and quality perception for produce,” he said.

As part of its cost reduction plan, Ahold also said it plans to close seven Stop & Shop stores and two regional support facilities in North Haven, Conn., and Edison, N.J. An undisclosed number of support positions will also be eliminated in the $50 million cost savings initiative. A Stop & Shop spokeswoman said the company is shifting to a network of smaller, regional support offices.