INVESTORS SEEK BREAKUP OF AHOLD

MARK HAMSTRA

AMSTERDAM - Two hedge funds last week called for Ahold here to take "drastic action" and divest all of its U.S. operations.

Paulson & Co., New York, and Centaurus Capital, London, said they have acquired a 6.4% stake in Ahold's stock and have begun "investigating options to create value for the benefit of various Ahold stakeholders."

The companies previously were reported to have accumulated a stake of less than 5% in Ahold and were said to be seeking a breakup of the company, but last week marked the first time the investors have publicly stated their position.

"Paulson and Centaurus believe keeping Ahold's disparate retail and wholesale businesses together diminishes shareholder value and limits the operating potential of the individual businesses," the firms said in a joint statement.

They could not be reached for further comment.

Analysts said the investor activism may prod Ahold's management to make some changes, but they said the company is likely to focus first on divesting its U.S. Foodservice business. They do not think Ahold will seek to shed its entire U.S. retail operations, which include the Stop & Shop, Giant-Landover, Giant-Carlisle and Tops chains. Ahold, whose performance has been slow to recover from a 2003 financial scandal, also operates supermarkets in Europe.

"I think the publications by Centaurus and Paulson do increase pressure on management to get its house back in order," said Richard Withagen, an analyst with SRS Securities, Amsterdam, in an interview with SN. "But I'm not sure this will actually accelerate the divestment of any part of the business."

He said he thinks Ahold will focus on improving the performance of U.S. Foodservice, the Columbia, Md.-based food-service distributor that was at the heart of Ahold's financial implosion, before seeking to dispose of it.

"I don't think that decision will be taken until 2008," he said, noting that Ahold may be able to get a better price for the division if it can finish its turnaround efforts there first.

Although Ahold currently is seeking to dispose of 46 Tops stores in Ohio, Withagen said he thinks Ahold will work to improve the remaining Tops locations rather than sell any more large blocks of stores.

Patrick Roquas, an analyst with Rabobank, Amsterdam, told SN he thinks Ahold will work on a much faster timetable and will seek to dispose not only of U.S. Foodservice but all of Tops and the company's Central European operations.

"[The shareholder activism] clearly increases the pressure on management to deliver faster on the recovery of the different parts," he told SN. "We anticipate management to dispose of some operations in the coming 6-12 months."

He previously said he valued the U.S. Foodservice division at about 4.2 billion euros, or $5.3 billion.

Ahold declined to comment on the investors' suggestions. In reports, it said it has not engaged in any discussions with the firms.

Paulson and Centaurus said they believe Ahold should become a "pure-play" European retailer. They said that by adopting a restructuring plan that sheds its U.S. operations, Ahold "could be worth in excess of 9 euros" per share, or about $11.50. Ahold's shares have been trading in the $7-$9 range for the past year and edged up to about $9.25 after the Paulson-Centaurus news.

Withagen agreed that the synergies of having retail operations on both continents were not clear, but he said he believes the company will retain its trans-Atlantic structure.

"I think Ahold will try to reinvigorate growth in the business and also stop the slide in the margins we have seen in the last few years," he said. "But I don't think selling these businesses is a scenario that management would like to follow."

The analysts said Paulson and Centaurus would seek to rally other investors to put pressure on Ahold, although they did not think the activist investors would attempt to acquire control.

The call to divest came following Ahold's report that second-quarter comparable-store sales were down at three of its four U.S. chains. Comparable-store sales were up 7.3% at Giant-Carlisle but down 0.2% at Stop & Shop, 0.4% at Giant-Landover and 4.5% at Tops.

Total sales at Stop & Shop/Giant-Landover were up 1.3% to $3.9 billion, and down 3.9% to $1.4 billion at Giant-Carlisle/Tops.

Sales at U.S. Foodservice increased 2.3% in the second quarter, to $4.4 billion.

The company, which is scheduled to report full earnings for the quarter on Sept. 7, said market conditions "remained competitive."