HANNAFORD TO EXIT SOUTH TO GET OK OF DELHAIZE DEAL

JON SPRINGER

SCARBOROUGH, Maine -- Hannaford Bros. here said last week it would sell or close all 51of its stores in the Southeast as it attempts to win Federal Trade Commission approval of its acquisition by Salisbury, N.C.-based Delhaize America.

Hannaford and Delhaize said the FTC provided "guidance" for the divestiture of 38 Hannaford stores. The plan, contingent upon FTC approval of the merger, calls for Hannaford to sell 20 stores to Kroger Co., Cincinnati; 12 stores and one site under construction to Lowe's Foods, Winston-Salem, N.C.; and five stores to Richlands, N.C.-based Sylvester/Floyd Group, which operates 26 Piggly Wiggly supermarkets.

In addition to the divestitures, Hannaford would close 13 North Carolina stores -- the remainder of the stores it owns in the Southeastern states -- because they lacked "critical mass" necessary to make sense economically, said Caren Epstein, a spokeswoman for Hannaford. The stores, primarily in the Charlotte, N.C., area, are to close this week, Epstein said.

Delhaize is the parent company of Food Lion, the supermarket chain with more than 1,110 stores, primarily in the Southeast. It said last August it would purchase Hannaford in a cash-and-stock transaction valued at $3.6 billion, including the assumption of debt.

The deal was approved by shareholders of both companies and has been under FTC review for several months.

None of the parties would divulge purchase prices for the stores Hannaford intends to sell. Jonathan Ziegler, a San Francisco-based securities analyst for Deutsche Banc Alex. Brown, New York, told SN he estimated the value of the assets "in the neighborhood of $200 million," but cautioned that forced divestitures tend to create a buyer's market.

The FTC's Bureau of Competition will review the plan and make its recommendations to the five-member commission board, Mitch Katz, a spokesman for the FTC, told SN.

The FTC would not comment specifically on its investigation of the Delhaize-Hannaford deal, he added. Though the companies in the divestiture plan are hopeful the deal will be approved sometime before August, Katz said there is no timetable.

Mark Husson, a securities analyst for Merrill Lynch, New York, told SN that the spinoffs are a further indication to the industry that "in-market acquisitions are a thing of the past."

Dutch supermarket chain Ahold in December cited "strong opposition" by the FTC when it abandoned its proposed acquisition of Pathmark Stores, Carteret, N.J. Other recent supermarket mergers, including Albertson's-American Stores and Kroger-Fred Meyer, also resulted in numerous divestitures.

All the Hannaford stores to be sold in the proposed deal represent new markets for their prospective buyers. Kroger currently operates 44 stores in Virginia, but none yet in the Tidewater and Richmond markets. Lowe's, which operates 87 stores in North Carolina and Virginia, would pick up six Hannaford stores and one store under construction in the Raleigh, N.C., area, and six in Wilmington, N.C. Sylvester/Floyd's five new stores also represent new markets, a Piggly Wiggly spokeswoman told SN.

All the buyers said they would convert the Hannaford stores to their own banners.

Delhaize officials have long said gaining Hannaford's well-regarded New England stores was the primary motivation for the merger and worth the risk of a so-called "clean sweep" in the Southeast.

"When we first considered buying Hannaford Bros., we did it so we could grow and expand into new markets," Tawn Ernest, a spokeswoman for Delhaize, told SN. "Hannaford is the strongest and most profitable chain in the Northeast -- it still fits the bill of what we wanted to accomplish."

Delhaize at the time of the deal also discussed the benefits of operating the Hannaford and Food Lion banners alongside each other in the markets they shared, with Hannaford serving a more upscale customer and Food Lion positioning itself toward the middle market.

"We had hoped the FTC would recognize parallel banners, but we knew there would be a possibility they wouldn't," said Epstein. "We understood going in there would be potential competitive issues."

Ernest said the companies considered "several scenarios" but added "this was the most attractive package to us that would also meet the approval of the FTC."

The proposed divestiture allows Delhaize to shed a Hannaford division that analysts have long considered to be an earnings drag. Hannaford entered the Southeast states in 1994 when it purchased the Wilson's Supermarket chain for $120 million. Hannaford grew sales and more than doubled its store count since then, but has yet to realize significant earnings gains there. "The EBITDA of those stores is approximately zero, so it's no skin off [Delhaize's] nose," said Husson.

The Charlotte-area stores that are closing this week in particular were money losers for Hannaford, analysts said.

Delhaize said it would keep Hannaford's distribution center in Butner, N.C., but had not decided what to do with it after Hannaford's stores were sold or closed.

One of the winners in the proposed shakeup could be Kroger, which "picked up good stores on the cheap," in the Richmond and Virginia Beach areas, said Andrew Wolf, an analyst with Scott & Stringfellow/BB&T Capital Markets, Richmond, Va.

"Ukrop's dominates the market in Richmond, but there's nobody really big in the middle here between Ukrop's and Food Lion," Wolf told SN. "Kroger also got some stores in a moderately good growth area of Virginia Beach.

"The interesting question for Kroger is whether they can keep the stores non-union," Wolf added.