AHOLD PUTS BI-LO AND BRUNO'S ON THE BLOCK 2004-02-16 (1)

DAVID GHITELMAN / Additional reporting by Mark Hamstra

ZAANDAM, Netherlands -- Ahold here said last week it intends to sell the supermarket chain with which it entered the U.S. market in 1977, Bi-Lo, Mauldin, S.C., as well as one of its more recent acquisitions, Bruno's, Birmingham, Ala.

Analysts said the move should strengthen the company, still reeling from last year's $1 billion accounting scandal and committed to reducing its debt by $3.2 billion within the next two years.

Analysts' estimates for how much Ahold could receive for the two chains ranged from $640 million to nearly $1.5 billion, although one U.S. retail consultant noted that recent store sales have generally failed to meet sellers' expectations. Potential buyers mentioned by analysts range from strong regional operators like Publix Super Markets, Jacksonville, Fla., to national chains like Kroger Co., Cincinnati.

When Ahold acquired Bruno's in 2001, the company said it paid approximately $500 million.

In an interview with SN last week, Dean Cohagan, who has been president and chief executive officer of both Bruno's and Bi-Lo since January 2003, said he thought there was "great value" for a potential buyer in the combined Bruno's and Bi-Lo chains, although some observers said they expected Ahold would have to sell the stores in small groups or as individual locations.

Cohagan said William Blair & Co., Chicago, which Ahold has retained to assist in the sale, has already been in touch with potential buyers. A spokesman for Ahold said no negotiations had begun, however.

Bi-Lo has a relatively new store base, Cohagan said, but Bruno's facilities were in need of upgrades when Ahold acquired the chain in 2001, and the parent company has not yet made such investments.

"To compete in the Southeastern market, you need capital investment, and that's what we're hoping for, somebody who can invest in the infrastructure of these two companies," Cohagan told SN.

He said the process of integrating the back-office operations of Bruno's and Bi-Lo, which began in January 2003, was partially complete, with functions like human resources and technology combined in Mauldin. Operations and finance remain locally controlled, and the marketing and merchandising functions are in the process of being combined. Bruce Efird, executive vice president and general manager, Bruno's, runs the day-to-day operations at that chain.

Ahold said the proposed sale was part of its "strategy to optimize its portfolio and strengthen its financial position by reducing debt." The company added that it intends "to focus its efforts on its remaining U.S. food retail operations," which include Stop & Shop, Quincy, Mass.; Giant Food, Landover, Md.; Giant Food Stores, Carlisle, Pa.; Tops Markets, Buffalo, N.Y.; and Internet grocer Peapod, Chicago.

Analysts noted that Bruno's and Bi-Lo have been Ahold's weakest-performing chains.

"The Southeast is a very competitive market, and both Bi-Lo and Bruno's have been struggling there," said Pascale Nachtergaele, analyst, Delta Lloyd Securities, Antwerp, Belgium. "I estimate that both chains are generating negative same-store sales growth."

The sale, which Ahold said it expects to complete by the end of the year, would both generate capital and relieve Ahold of the task of trying to improve performance at the two chains, observed Patrick Roquas, analyst, Kempen & Co., Amsterdam. He estimated that the chains could sell for $640 million to $770 million.

Nachtergaele offered an even higher estimate, saying that Bi-Lo could fetch $959 million and Bruno's, $532 million.

Bi-Lo currently operates 292 stores and had net sales of $3.2 billion last year, while Bruno's, which operates 178 units, had net sales of $1.8 billion. Bi-Lo operates two full-service distribution facilities in Mauldin and Chattanooga, Tenn., while Bruno's has one warehouse in Birmingham and buys some health and beauty care products from Supervalu, Minneapolis.

In a letter to Bi-Lo's and Bruno's employees last week, Cohagan wrote, "Ahold intends to find new owners...who will be committed to continuing [Bi-Lo's and Bruno's] long heritage of customer service and commitment."

Finding such owners will not be easy, analysts noted. "It depends on how much appetite there is for such operations, which are -- from a profitability and like-to-like sales growth point of view -- not very interesting," said Roquas. Still, he noted, for an investment firm "it might be different, depending on the price they have to pay for it."

Andrew Wolf, analyst, BB&T Capital Markets, Richmond, Va., said he doubted that an investment firm would be interested, however, because of the competition in the region from Wal-Mart Stores, Bentonville, Ark.

David Livingston, a Pewaukee, Wis.-based retail consultant, told SN neither chain is likely to be acquired by a single company "because they're performing poorly." He said the fate of Bi-Lo and Bruno's was likely to be similar to that of other recent, smaller divestments, such as the sale by Spartan Stores, Grand Rapids, Mich., of its Food Town units, or by A&P, Montvale, N.J., of its Kohl's stores in Wisconsin, where one chain bought a handful of units, independents took a few more, and the rest of the stores went unsold.

He added that recent store sales have rarely met sellers' expectations. "A lot of chains are surprised by how little they get for their stores," he noted.

However, Livingston observed that at least some of the Bi-Lo and Bruno's stores should attract buyers. "This could be an opportunity for Ingles, Kroger, Publix, Harris Teeter and Piggly Wiggly and a lot of independents to say, 'OK, maybe they've got a better location we can move into,"' he said.