PRESSURE ON AHOLD AS INVESTORS EYE RESULTS

MARK HAMSTRA

AMSTERDAM - The deconsolidation of the industry may not be over yet.

Following on the heels of Albertsons' sale this month, Ahold shareholders may put pressure on that company to split itself up if its performance does not improve, analysts told SN last week.

The speculation followed reports in a London business newspaper that activist hedge funds have been accumulating Ahold's shares with an eye toward dividing it into three parts: U.S. Foodservice, U.S. retail - which includes the Stop & Shop, Giant-Landover, Giant-Carlisle and Tops banners - and European retail.

"I think results will have to improve in the short term, otherwise shareholders will lose their patience and put pressure on Ahold to break up," said Pascale Nachtergaele, an analyst with Delta Lloyd Securities, Antwerp, Belgium.

Ahold, based here, is scheduled to report its first-quarter earnings this week. The company has said earlier this year it does not expect to achieve the financial goals it previously had set for 2006.

Last week a report in London-based newspaper The Business said hedge fund Centaurus, also based in London, has acquired a 4% stake in Ahold and may be seeking to force the company to split up into its major divisions. The paper said Centaurus has quietly built its stake in Ahold during the past several months, possibly in partnership with New York-based hedge fund Paulson & Co.

A Centaurus spokesman declined to comment, and Paulson & Co. could not be reached for comment.

Speculation about the possible breakup of Ahold has been circulating for several months, but most of the talk until now has involved possible interest by outside buyers, such as London-based Tesco.

"The main difference now is that for the first time, outspoken pressure is coming from shareholders," said Patrick Roquas, analyst, Rabo Securities, Amsterdam.

Roquas said he foresees a three-stage breakup in which Ahold first divests U.S. Foodservice, then sheds more underperforming assets and finally splits its European and U.S. retail divisions.

He values the U.S. Foodservice division at about 4.2 billion euros, or $5.3 billion, while Nachtergaele values it slightly lower, at just under $5.2 billion.

"If there is one division that is sold, everyone is thinking it is U.S. Foodservice for sure," Nachtergaele said. "Then they may split U.S. and Europe."

Ahold's European businesses, which Nachtergaele values at about $8.2 billion, are more complicated than its holdings in the U.S. because Ahold does not have a 100% interest in all of its European operations. She suggested the company could choose to sell off its money-losing banners in Central Europe.

In the U.S., speculation has centered on the sale of Tops, which has been divesting stores in upstate New York as sales have foundered. Nachtergaele said the weak economy in northeastern Ohio has prevented the company from selling stores in that market.

In a preliminary sales report last month, Ahold said first-quarter sales at its food-service distribution business in the U.S. were up 3.8% over year-ago levels, while sales at its U.S. retail segments - Stop & Shop/Giant-Landover and Giant-Carlise/Tops - were down 0.8% and 5.6%, respectively.

"The sales in the first quarter were better than expected at U.S. Foodservice, so the focus will be on improvement of the operating margin when the company reports full results," Nachtergaele said. "The focus will also be on the operating margin in U.S. retail."

She projected net income of 166 million euros, or about $210 million, an increase of about 24% over year-ago results.