FOOD LION ON THE PROWL WITH DEAL FOR HANNAFORD

DAVID ORGEL

SALISBURY, N.C. -- Food Lion here raised its profile in the quickly changing U.S. retail consolidation game last week with its agreement to acquire Hannaford Bros., Scarborough, Maine.

In announcing it would form a holding company to acquire Hannaford, Food Lion would gain more than a retailer whose 1998 sales were $3.3 billion. It also would get a growth vehicle -- in the new holding company Delhaize America -- to bring other operators into the group later on, furthering the ambitions of its Belgium-based controlling shareholder Delhaize.

Delhaize America -- which is to be formed this September -- would acquire all the outstanding shares of Hannaford in a cash and stock transaction valued at about $3.6 billion, including the assumption of debt. That amounts to $79 per share.

But financial analysts said that in outbidding other supermarket operators for Hannaford, Food Lion would be paying a high price for its acquisition and would take on heavier leverage. Defending the price tag in an interview with SN, Bill McCanless, president and chief executive officer of Food Lion, said the expense is necessary to grab a rare opportunity.

Reflecting concern over the price of the deal, Food Lion's shares fell Aug. 18, the day the arrangement was unveiled. The retailer's class A nonvoting shares fell 23% to 8 15/32 while its voting class B shares declined 21% to 8 13/16. Hannaford's stock, in contrast, rose 14% to 72 3/4 Aug. 18.

Food Lion shares recovered only fractionally at the close Aug. 19 with the A shares at 8 23/32 and the B shares at 8 27/32. Hannaford shares fell slightly to 71 7/8 at the Aug. 19 close.

The merger would produce a new entity with more than 1,400 stores throughout the eastern United States from Maine to Florida, with total sales of about $13.5 billion, making it the ninth biggest company on SN's list of food retailers and wholesalers, and the seventh biggest food retailer.

The transaction would also mean that global retailer Delhaize is making good on its intention to become more involved in U.S. consolidation after years of avoiding such deals. Food Lion reportedly lost out in its attempt to acquire Pathmark Stores, Carteret, N.J., earlier this year. Delhaize, based in Brussels, Belgium, acquired Food Lion in 1974 and owns 45% of the chain's total stock and 52% of its voting stock.

"This is a premium property, a unique, one-of-a-kind company," McCanless told SN. "We see the value justifying the price.

"The Hannaford brand, with a long history, has a strong reputation in existing markets," he said. "It can be introduced into new markets. It has a commitment to quality, fresh foods and general merchandise."

Among the highlights of last week's developments:

Hannaford would be operated as a separate subsidiary of Delhaize America and would retain its brand and management team, including Hugh G. Farrington, the president and chief executive officer, who would continue to operate the company. Delhaize America would include Food Lion and Kash n' Karry Food Stores.

Delhaize America would be located in Salisbury but retain the individual headquarters offices of each retailer, in both Scarborough and Salisbury.

Food Lion would authorize a one-for-three reverse stock split of the company's outstanding shares of common stock in a move to enter a different trading range for the shares. In addition, 500 million shares of a new class of "blank-check" preferred stock would be authorized that could be issued for a variety of reasons in the future.

Delhaize America would be listed on the New York Stock Exchange beginning Sept. 9, and the company's two classes of common stock would be traded on the New York Stock Exchange under the symbols "DZA" and "DZB." At the same time, Food Lion would delist from the Nasdaq National Market system.

The companies said they expected synergies of about $40 million in the merger's first year and approximately $75 million annually by the third year.

"Delhaize America is an excellent strategic growth partner in an industry which continues to consolidate," Farrington said. "Its structure will enable us to expand our operations and ensure that we will continue to provide our customers with the highest-quality products and services."

In discussing the formation of Delhaize America, Food Lion also outlined the holding company's leadership structure. McCanless would become CEO and Farrington would be vice chairman. Pierre-Oliver Beckers would become chairman of that entity. Beckers is chairman of Food Lion and CEO of Delhaize.

McCanless, Farrington and Beckers would form the executive committee of Delhaize America, and McCanless and Farrington would report to Beckers. Although Delhaize America would be based in Salisbury, most of its work would be accomplished out of the existing corporate offices of Food Lion and Hannaford with little bureaucracy added, McCanless said.

Food Lion is looking at a six- to nine-month period for completion of the transaction, McCanless said. The integration is expected to run smoothly and the deal would result in major synergies, he said.

Food Lion cited the high operating margins of both companies as a strong common link. It also pointed to both companies' strengths in information technology, category management and associate relations. In addition, Food Lion said, each merger partner would benefit from each other's strengths. Hannaford brings expertise in general merchandise and in-store services, while Food Lion offers strength in marketing, cost containment and real-estate development, the company said.

As one early example of synergy benefits, Hannaford's distribution facility in Butner, N.C., has unlimited expansion capabilities that can help relieve pressure on Food Lion's Petersburg, Va., facility, McCanless said. "That will resolve a logistics issue for us," he said.

In discussing prospects for future acquisitions, McCanless said the company won't make a major purchase in the near term. "First we must digest this one," he said. "This uses a lot of capital resources, and we want to pay down our debt. I think in the interim we may do some smaller in-market acquisitions. Because it will take six to nine months to close this transaction, I would say it will be beyond next year before we do another major one."

McCanless said he worked on the Delhaize America holding-company strategy to create an attractive acquisition vehicle for a range of brands "in a holding company that doesn't have a brand name."

The changes in structuring of the corporate stock were made with careful consideration of the company's overall strategy, McCanless said. "We needed to be on the New York Stock Exchange to get greater visibility and the ability to attract institutional investors," he said. "Institutional investors say the one-for-three reverse stock split puts us more in line with trading ranges we're comfortable with."

Food Lion noted that Delhaize America would be among the Top 15% of listed companies on the NYSE in terms of sales and market capitalization.

The corporate realignment of Food Lion requires shareholder approval. The company has scheduled a special shareholders' meeting in New York City Sept. 7 for this purpose. Food Lion, with 1,258 stores in the Mid-Atlantic and Southeastern states from Pennsylvania to Florida, operates under the banners of Food Lion, Kash n' Karry and Save 'n Pack. It posted 1998 sales of $10.2 billion. Hannaford, with 152 stores in New England, New York and the Southeast, operates under the banners of Hannaford and Shop 'n Save.

The deal has been approved by the boards of directors of both companies, and still must be approved by Hannaford shareholders and get regulatory clearance. The transaction has been approved by the largest shareholders of each company, which are Delhaize in the case of Food Lion and Empire Co. for Hannaford.

In a conference call with financial analysts monitored by SN, company executives said it was too early in the merger process to discuss the outlook for Hannaford's Internet-based home-delivery grocery service called HomeRuns. Last May Hannaford said it was seeking a strategic partner for that experimental service, which needed more customers to break even.

Asked if regulatory clearance would require divestitures because of overlapping stores in the Southeast, McCanless told analysts that the company would be proactive in explaining its interpretation to the Federal Trade Commission. "We're taking a micromarket approach," he said. "While Charlotte appears to be an overlap, Hannaford is present in southeast Charlotte while Food Lion is in west-north Charlotte. So we'll look at it with a micro basis and work closely with the FTC."

Analysts last week pointed to the high price of the Hannaford deal as a hurdle for Food Lion.

Jack Russo, an analyst with A.G. Edwards & Sons, St. Louis, said, "In the long term it's a good transaction for them; they bought a good company. But they paid a lot. The market is feeling they overpaid, reflected in the drop in their stock after the deal was announced. As far as future deals for the company go, this will be it for a while."

Chuck Cerankosky, an analyst with McDonald & Co., Cleveland, pointed to the cost as "a higher price than I would have guessed. Rather than $79, I would have expected something in the $60s.

"I'm quite surprised someone would outbid Ahold for the property. Food Lion will have to work doubly hard to recreate value for shareholders that the market took away."

Cerankosky said that the debt created from the deal would mean a reduced capacity to borrow for future acquisitions. "So the company would have to put up funds for future deals in order to avoid leveraging the balance sheet more."

Cerankosky said he agreed with company executives that the integration should be smooth.

Shifting Lineup

Delhaize America, the holding company that would be formed to encompass Food Lion and Hannaford Bros., would become the nation's ninth-largest food distributor and seventh-largest retail chain on SN's Top 75 list of retailers and wholesalers. Following is the new lineup for the Top 10 companies on that list, including sales from deals that are pending but not yet completed, based on year-end 1998 sales: