AHOLD USA'S WORLD

ELLIOT ZWIEBACH / JENNIFER OWENS

LANDOVER, Md. -- The industry took another step toward consolidation last week, as Giant Food here said it has agreed to be acquired by Ahold for $2.6 billion -- a transaction that would make the Netherlands-based retailer the fifth-largest food store operator in the United States.

"This is a giant step forward," Robert Zwartendijk, president and chief executive officer of Ahold USA, Atlanta, quipped during a news conference here last week. "We think Giant is one of the first-class companies in the United States, [and] it has always been high on our list."

Zwartendijk said Giant initiated the merger talks in January.

Trade observers said the deal -- expected to close in late summer -- could have a significant effect on the Washington and Baltimore markets -- where Ahold would butt heads for the first time with the nation's third-largest retailer, Safeway -- and also in the Mid-Atlantic region, where some of Giant's Super G stores could help strengthen Giant Food Stores, Carlisle, Pa., another Ahold operation.

Officials of both Ahold and Giant said last week the merger would result in several developments at Giant:

Lower prices and the introduction of a frequent-shopper card program.

Expansion of the Giant franchise north and south of its core marketing area.

Retention of existing chain management to run Giant as an autonomous operation, with no layoffs anticipated.

In disclosing the transaction last week, Ahold said it would pay $43.50 per share for Giant's 59.9 million outstanding shares, including the controlling shares of Class AC stock owned by the chain's top executives and the Class AL voting stock owned by J. Sainsbury plc, London; Ahold also said it plans to commence a tender offer at the same price for Giant's publicly held Class A non-voting stock, which accounts for 80% of the chain's shares.

Giant operates 164 Giant Food stores in Maryland, Virginia and the District of Columbia and 13 Super G stores in New Jersey, Pennsylvania and Delaware, including three freestanding pharmacies.

One trade observer, who asked not to be named, told SN the Federal Trade Commission is likely to force Giant to sell off some of the Super G's as a prerequisite to a merger, with Ahold shifting control of the remaining Super G's to Giant Food Stores of Carlisle -- a move that would strengthen that operation by removing a competitor from the marketplace.

Ahold entered the United States in 1977 with the acquisition of Bi-Lo, Mauldin, S.C. It acquired Giant Food Stores in 1981; First National Stores, Maple Heights, Ohio (including Edwards Super Food Stores, Windsor Locks, Conn.), in 1988; Tops Markets, Buffalo, N.Y., in 1991; Red Food Stores, Nashville, Tenn., in 1994; Melmarkets, Long Island, N.Y., and Mayfair Super Markets, Elizabeth, N.J., in 1995; and Stop & Shop Cos., Quincy, Mass., in 1996.

It subsequently combined First National with Tops; Mayfair and Mel with Edwards; Edwards with Giant of Carlisle; and Red Food with Bi-Lo. Ahold's U.S. sales in 1997 totalled $14.3 billion. The addition of Giant's $4.2 billion in 1997 sales would boost Ahold's U.S. sales base to $18.5 billion, moving it past Albertson's, Boise, Idaho, as the fifth-largest food retailer in the United States -- exceeded only by Kroger Co., Cincinnati ($26.6 billion in 1997); Wal-Mart Supercenters, Bentonville, Ark. ($25 billion); Safeway, Pleasanton, Calif. ($22.5 billion); and American Stores Co., Salt Lake City ($19.1 billion). Debra Levin, a securities analyst with Morgan Stanley Dean Witter, New York, said she doesn't expect Ahold to make another U.S. acquisition for at least a year or two, "but longer term, Ahold is likely to set its sights further abroad than the East Coast, possibly looking at chains in the Midwest and West."

Levin said she believes the acquisition of Giant Food by Ahold is "a terrific acquisition that really secures Giant's future. Giant was embarking on a strategy of improving efficiencies and, ultimately, operating margins, and Ahold will complement what Giant was already planning to do." She said Ahold expects the addition of Giant Food to its retail stable would result in annualized savings of $30 million in 1999 and $50 million in 2000. Chuck Cerankosky, an analyst with the Cleveland office of Tucker Anthony, Boston, said he anticipates Giant would be more competitive under Ahold's ownership. "Giant is in a position to reduce costs and pass those savings on to consumers while doing a better job leveraging its merchandising reputation, and with Ahold pushing it along faster than might otherwise be the case, competition could heat up in some of Giant's markets," he said. Levin said she doubts an increase in competitive activity. "Giant has been very price-aggressive since early 1997, and it will continue with that focus," she told SN. "And the change in Giant's ownership doesn't change the competitive outlook in the area because there's no increase in store numbers."

Speaking at last week's news conference, Pete Manos, president and CEO of Giant Food, said the impetus for his company to approach Ahold was the potential for expansion.

"In the short term we could do anything we wanted," Manos said. "But when you look long term to the future growth of the company, we felt this was best for the company. The problem is growth and expansion, and with Ahold, we feel we can do that a lot better than we can alone.

"And we felt that, if Izzy Cohen [Israel Cohen, Giant's founder, who died in 1995] was alive, he'd make the same decision."

Manos said Giant's future expansion could occur north and south of its core marketing area of Baltimore and Washington. "I think there are a lot of opportunities, and I think you'll see Giant of Carlisle and Super G closing some of those gaps up North."

However, he said he does not anticipate a merger between the two Giant Food chains anytime soon.

Zwartendijk echoed Manos' comments about expansion. "We buy companies -- not [just] to have them but to expand them. We have grown every single company, and we look forward to Giant growing," he told the news conference.

He added, however, that no targets for growth have been established yet.

Giant approached Ahold, Manos said, "[because] we looked for the company that most closely approximates our own -- [one with a record of] integrity, good employee and community relations and service to customers.

Zwartendijk said Ahold plans to retain Giant's existing management team. "Our strategy has been to maintain these individual companies," he said, while seeking synergies in such areas as private label and information technologies.

Manos said he does not expect the change in Giant's ownership to result in personnel cutbacks. "I don't expect any layoffs," he said. "There's always going to be some movement, but to the contrary, I would expect more stores and more jobs."

Zwartendijk acknowledged that Giant's prices are likely to fall. Asked at the news conference if prices will come down once the merger is completed, Zwartendijk replied, "It's always hard to say that prices will come down all over, but the answer is yes."

He also said Giant would begin offering a loyalty card, with most future Giant promotions built around the card program. "It's the centerpiece," he said. "You have to be a member of the loyalty program to get the promotion."

Giant introduced a loyalty card several years ago but discontinued it, reportedly after being disappointed by the results.

Upon completion of the purchase, Ahold would be entitled to appoint all nine members of Giant's board. Currently, the AC shares elect five directors and the AL shares elect the other four.

The Top 10 Retailers

Ahold's acquisition of Giant Food would make it the fifth-largest food retailer in the United States. Volumes are based on actual 1997 year-end results or estimates.

Sales

Rank Company in billions

Kroger Co., 26.6

1 Cincinnati

Wal-Mart Stores, 25.0

2 Bentonville, Ark. estimated

Safeway, Pleasanton, 22.5

3 Calif.

American Stores Co., 19.1

4 Salt Lake City

Ahold USA, 18.5

5 Atlanta pro forma

Albertson's, 14.7

6 Boise, Idaho

Winn-Dixie Stores, 13.2

7 Jacksonville, Fla.estimated

Fred Meyer Inc., 12.8

8 Portland, Ore.pro forma

Publix Super Markets, 11.1

9 Lakeland, Fla.estimated

A&P, 10.3

10 Montvale, N.J.