AHOLD'S GIANT PATH

DAVID GHITELMAN

ATLANTA -- Ahold, the global retailer based in Zaandam, Netherlands, is the sort of company that does acquisitions so well it makes them look easy, industry analysts agreed.

"They're getting better and better at integrating," said Debra Levin, an equity analyst with Morgan Stanley Dean Witter, New York. "They had huge success with Stop & Shop and they were positively glowing talking about how well Giant has done."

Analysts said the Dutch food retailer, whose U.S. arm is Ahold USA, has built up its presence on the U.S. East Coast through buying strong but troubled firms -- companies, say, with good locations and loyal customers that are being held back by conservative management or a lack of cap-ex funding -- and worked to eliminate the troubles quickly. Its turnaround tactics involve no secret weapons, just a back-to-basics approach: instituting best practices, taking advantage of economies of scale and pumping in lots of cash.

Meanwhile, Ahold is keeping the industry guessing about where its next big deal will be. It began this month by acquiring two small Spanish supermarket chains, and virtually whenever there is takeover talk about a food retailer, either in Europe or eastern North America (from the Deep South to Quebec), Ahold's name arises as a likely buyer.

The situation at Giant Food, Landover, Md., which Ahold acquired in November 1998, has been steadily improving, according to Ahold. "We are more than pleased with the progress that is being made at Giant Landover, where sales and results clearly exceed our expectations," said Cees van der Hoeven, company chairman and chief executive officer, earlier this month. He attributed Giant's success largely to "increased promotional activity and cost savings."

Analysts agreed the takeover of Giant appears to be a success, although they said they wished they had something more to go on than Ahold's statement. "It's hard to measure," said Gary Giblen, New York-based managing director of Banc of America Montgomery Securities, San Francisco, "but we can accept on face-value it's going well."

Most analysts also agreed the chain had been improving before Ahold bought it. "Giant had the qualities Ahold looks for -- market share, customer recognition, good locations," said Meredith Adler, equity analyst at Lehman Bros., New York. "It wasn't broken, but it needed some of what Ahold could bring to the table. It needed a new management outlook."

Giblen said the management change had already begun when Ahold acquired the chain. "Giant was intelligently being turned around the year before it was acquired by Ahold," he said.

What Ahold did, Giblen added, was accelerate a change in the corporate culture: "Giant was a proud and paternalistic organization. They had a lot of stores that didn't have any reason for being, but Giant didn't close stores. Ahold told them they had to be a little more competitive, more cost conscious."

In its pending deal to buy Pathmark Stores, Carteret, N.J., Ahold will be acquiring a management team, headed by James Donald, that it intends to keep in place as well as a name so popular with customers Ahold will use it to reflag its Edwards-bannered stores.

"The acquisition of Pathmark provides Ahold with a large number of high-quality locations in an attractive market where our position left room for improvement," said Robert Tobin, president and CEO of Ahold USA. "This is now going to change.

"We expect considerable synergies from the integration [of Pathmark] with our sister operations. In particular, the exchange of best practices, the restructuring of the Pathmark balance sheet and the integration of certain administrative functions will positively impact on cost and benefit the bottom line significantly."

"What Pathmark has is a strong regional franchise with a solid store-base both in terms of size and location, along with significant market share," said a securities analyst, who spoke on condition of anonymity. "What Ahold has is buying power."

Giblen said, "Pathmark's big problem has been capital expenditures. Its store conditions are not really competitive. Ahold brings money to Pathmark and that's all it needs."

The analysts also said the reflagging of Edwards was essentially a no-brainer. "Edwards was not doing well," said Adler. "It didn't have critical mass." Folding the chain into Pathmark, she add, was "solving a problem for Ahold."

Perhaps the biggest hurdle Ahold faces in acquiring Pathmark is the one posed by gaining approval from U.S. antitrust regulators. When Ahold took over Giant, the Federal Trade Commission required the chain to sell off 10 of the newly acquired Giant supermarkets. In the Pathmark acquisition, industry analysts told SN they thought the FTC appeared to be taking a very hard look at the deal.

Levin said she thought Ahold still hoped for the deal to close sometime in the last three months of the year, "but there are big FTC discussions, so in this day and age it's hard for anybody to know" when the deal will be approved.

She added, "There's obviously a great deal of overlap between the Pathmarks and the Edwards," an Ahold-owned chain with many units in the New York metro area.

Ted Bernstein, a high-yield analyst with Granchester Securities, New York, said he believes Ahold will eventually be able to overcome any stumbling blocks government regulators may put in its way.

"I think there's absolutely negligible field risk," he said. "Ahold has been through this drill in this country many times over the last several years. They've thought this through. They know what they're doing. "Yeah, they're going to have to divest some stores, close some stores, what have you. But I think this thing definitely closes. The only question is how long it takes for the FTC to go through it."

In the wake of the Carrefour-Promodes deal in France, some analysts believe Ahold will turn its attention to its home continent. But van der Hoeven has said the company intends to remain a player in Europe and in the United States.

"In Europe, the predicted consolidation process has started," he said earlier this month, four days after the two major French retailers, Carrefour and Promodes, announced they would combine forces.

"We are positioning our company to be ready to take an important next step as and when the right opportunity arises. As always, it takes two to tango and remember that our criteria remain unchanged and strict," he added.

Ahold has demonstrated it can be a choosy shopper, balking when a price gets too high. Van der Hoeven said the company was a bidder in the limited auction for Hannaford Bros., the Scarborough, Maine-based chain purchased in August by Delhaize, the Belgium-based parent company of Food Lion, Salisbury, N.C., for $3.6 billion.

"We apply stringent financial criteria to acquisitions," said van der Hoeven. "It is our stated purpose to only pursue acquisitions when we are convinced that we can add significant value over and above the purchase price. In the meantime, we continue to see significant further growth potential on the U.S. East Coast, autonomously as well as through acquisitions."

As far as acquisitions go, van der Hoeven appears to know which companies he wants to be following.

"Let me assure you," he said, "we have not lost out on any one of our preferred candidates."

Ahold USA * Giant Food, Pathmark

NAME: Ahold USA

HEADQUARTERS: Atlanta

ACQUISITION DATE: November 1998 (Giant), pending (Pathmark)

COMBINED VOLUME: $19.9 billion TOP EXECUTIVE: Robert Tobin, president and chief executive officer