AHOLD PLANS ASSET SALES, MORE CENTRALIZED CONTROL

DOUGLAS HEINGARTNER

ZAANDAM, Netherlands -- Ahold here has revealed a sweeping restructuring strategy, which includes plans to issue 2.5 billion euros (about $2.9 billion) in stock and sell off its Spanish operations.

In a press conference here, Anders Moberg, chief executive officer, said the "road to recovery" would include divestments amounting to nearly $3 billion by 2005, though he maintained that Ahold's troubled U.S. Foodservice subsidiary would not be sold off. Ahold is currently saddled with over $12.6 billion in debt.

Surrounded by an army of camera teams at the conference, which was markedly less hostile than a previous meeting when he was installed as CEO, Moberg outlined a three-year plan to recover the health of the world's third-largest retailer, whose U.S. assets include Stop & Shop, Bruno's, Giant-Landover, Giant-Carlisle, Tops, Bi-Lo and Peapod. The first order of business, he said, was getting the internal controls in order, so as to avoid the unseemly tailspin that began in February of this year with the revelation of over $1.1 billion in accounting irregularities, primarily at Ahold's U.S. Foodservice distribution company.

The "new Ahold," as Moberg put it, would be a company focused on "organic growth," a marked departure from the rapid acquisition strategy of the go-go 1990s. The haphazard integration of those assets into the rest of Ahold "almost destroyed this company," Moberg said. In the new and improved Ahold, individual company divisions will have less room for autonomy. "Centralized control," he said, "is non-negotiable."

Restoring the financial health of the beleaguered U.S. Foodservice is also a priority, and its new CEO, Larry Benjamin, hopes to achieve this within 18 to 24 months, the company said. And on the retail side, plans to re-engineer Ahold's retail food business by streamlining its infrastructure and sourcing arrangements should achieve nearly $700 million in annual savings by 2006.

Ahold after the press conference said it plans to explore synergy opportunities between its 341-unit Stop & Shop chain, based in Quincy, Mass., and Giant Food, Landover, Md., which operates 195 supermarkets in Virginia, Maryland, Delaware, New Jersey and Washington, D.C. The company said details about what management and administrative functions would be shared between the two chains have not been finalized. Consulting firm McKinsey & Co. is assisting in the process, the details of which are slated to be revealed next year.

The move to combine functions at Stop & Shop and Giant-Landover follows similar actions at Ahold's Giant-Carlisle and Tops chains and its Bi-Lo and Bruno's chains.

Food retail analyst Patrick Roquas of Kempen & Co., Amsterdam, Netherlands, called Ahold's strategy "a step in the right direction," but not one bold enough for his company to upgrade its Ahold recommendation from neutral. "The growth target for food retail in the U.S. is not a very aggressive one," he said, referring to Moberg's modest goal of 5% annual growth in net sales and a 5% growth in earnings before interest, taxes, depreciation and amortization by the year 2005.

The ostensible occasion of Friday's meeting was the announcement of Ahold's half-year results, which Roquas called "disappointing," especially the performance of the scandal-plagued U.S. Foodservice. Ahold's net income for the first two quarters of 2003 was $69 million, compared with a $163 million loss last year, with sales down 11.8 percent, to $34.8 billion.

The company also reported a 3.1% decline in second-quarter operating income (before goodwill and exceptional items) in its U.S. retail division, to $347 million, or 5.6% of sales, which increased 1.1% to $6.23 billion. Lower income at the company's Tops, Bruno's and Giant-Landover banners was only partially offset by strong performances at Stop & Shop and Giant-Carlisle.

In order to achieve an "investment-grade profile" by 2005, Moberg said, Ahold's core focus will be on supermarkets, more specifically on those that can likely achieve a No. 1 or 2 market position in the next three to five years. Those that cannot "will be disposed of," he said. That leaves major question marks surrounding underperforming assets like Ahold's operations in Portugal and central Europe (Ahold has already said it would divest most of its operations in Latin America and Asia).

Though the company was mum about where the rest of the $3 billion in divestments will come from, neither the troubled U.S. Foodservice nor some of Ahold's more sluggish U.S. retail operations are completely out of the woods, analysts said.

"[Ahold] will need to do more" to reach the desired divestment level, Roquas said. "You can certainly not rule out some of the U.S. retail operations. And those might be then Bruno's or Bi-Lo, for example."

The markets have cautiously applauded Moberg's new vision. Ahold's share price rose just over 5% on the day of the announcement. "The share is kind of stuck at this level because the market is waiting for the [stock] issue" on Nov. 26 (when Ahold will also release its third-quarter results), said Roquas.

The consensus is that the worst has past. Ahold, Roquas said, "is sailing into more safe waters now."