THE NEW DELHAIZE 1999-09-13 (2)

DAVID ORGEL

NEW YORK -- The industry's newest supermarket holding company, Delhaize America, was born last week in a move that furthers the newly aggressive U.S. consolidation strategy of majority shareholder Delhaize of Belgium.

Delhaize America was created from a corporate restructuring of Food Lion, Salisbury, N.C., at a special shareholders meeting here. Following the meeting, top executives of the new entity provided an interview for SN in which they outlined further growth plans -- including synergies and capital expenditures -- involving the pending $3.6 billion acquisition of Hannaford Bros., Scarborough, Maine, announced last month.

The new Delhaize America holding company will have subsidiaries, including Food Lion and it's Kash n' Karry unit, and is to make Hannaford a subsidiary when that deal closes. Delhaize America began its listing on the New York Stock Exchange Sept. 9 following the de-listing of Food Lion shares from the Nasdaq National Market System. Company executives stressed that the new corporate structure and the Hannaford deal pave the way for long-term growth.

"For many years the markets have indicated that Food Lion must show it would become one of the leaders and consolidators and not just a regional player," said Pierre-Oliver Beckers, who is chairman of the new Delhaize America and is also chief executive officer of Delhaize Belgium. "We are now one of the consolidators."

Delhaize America last week also named Joseph Hall president of Food Lion. Hall, a Food Lion veteran, has been senior vice president of operations and chief operating officer since 1995. Bill McCanless, chief executive officer of Delhaize America, will also remain CEO of Food Lion.

The measures approved by shareholders last week included:

Forming the holding company Delhaize America, which will develop a portfolio of branded companies and facilitate future acquisitions

Enacting a one-for-three reverse stock split of Food Lion outstanding shares of common stock (Classes A and B), which were converted into Delhaize America shares.

Authorizing 500 million shares of a new class of "blank check" preferred stock that could be issued for various purposes.

Increasing the maximum number of authorized directors of the company from 10 to as many as 14.

Company executives detailed to SN how they expect to achieve the major synergy plans in the Hannaford deal, which was expected to close in a six- to nine-month period from last month's announcement date. Projections are for synergies of about $40 million in the merger's first year and approximately $75 million annually by the third year.

"The synergies can pay for the transaction," said McCanless. "Despite Hannaford's management team's autonomy in operating stores, marketing and merchandising, there will be shared attributes."

He said there would be some consolidation of administrative functions that won't disrupt the need to keep many aspects separate. He cited consolidation of the investor relations and treasury functions and procurement as opportunities.

"While each company will do category management the way it does best, we'll be able to combine the procurement side of the business to match up, in particular, the Top 10 manufacturers to both companies," he said.

Hannaford is to provide the other Delhaize America operations with immediate access to some higher margin seasonal general-merchandise items. "We are developing those items, but they are already there, so we can begin to roll that out."

Hannaford is also expected to help in areas ranging from pharmacy management to inventory turns.

"Hannaford has very good inventory turns in the business, among the best," McCanless said. "We're trailing the business on inventory turns," he added, noting the opportunity for improvement in that area.

Discussing capital expenditure projections, McCanless said, "We see a 3% to 3 1/2% capital-expenditure budget for the combined company, and our plan is for accelerated growth in the Northeast states for Hannaford. We'd like to see 10 to 20 Hannafords a year coming on line on an annual basis."

In addition, McCanless said, down the road the company will probably find acquisition fill-in opportunities involving small chains. However, for the near future, Delhaize America will place its focus on integration and retirement of debt rather than acquisitions, he said.

Executives also addressed the future of Hannaford's Internet-based home-delivery grocery service called HomeRuns, a subject they declined to discuss in detail last month when the Hannaford deal was announced. Hannaford said last May it was seeking a partner for HomeRuns, a Somerville, Mass.-based service, because of losses and inability to attract a sufficiently large customer base. McCanless said that the search for a strategic partner for HomeRuns -- which Hannaford put on hold during the process of tying up the merger with Food Lion -- would now probably continue.

"They will likely pick up that process and move ahead with a plan to eliminate HomeRuns as a drag on the Hannaford earnings," McCanless said. However, they will "maintain some continuing ownership role."

Beckers added, "I think it's important to maintain some ownership because of the importance of e-commerce as it develops in food retailing."

The price of the Hannaford deal has raised some questions from analysts, who said the price is high. But Beckers continued to defend the transaction's cost last week. He said the 12.3 EBITDA [earnings before interest, taxes, depreciation and amortization] multiple paid wasn't out of line with recent public deals.

"Ahold paid a multiple of about 12 for Giant of Landover while Carrefour is paying about 19.5 times EBITDA for Promodes," he said. "So we are in the right range."

Beckers also dismissed suggestions that a recent stepping up of food retail acquisitions in Europe puts new pressure on Delhaize and other retailers there.

"We have now answered our U.S. growth challenge, which was our No. 1 challenge," he said. "We will look at opportunities in existing markets, but there's no pressing challenge in Europe to consolidate."