By Peter Evans
European grocery chains Royal Ahold NV and Belgium's Delhaize
Group confirmed Tuesday they are in talks about a near-$26 billion
merger that could create one of the largest supermarket operators
in the U.S.
Despite being based in Europe, both companies generate about 60%
of their sales in the U.S., primarily along the East Coast.
Netherlands-based Ahold operates the Stop & Shop and Giant
chains, as well as online grocery store Peapod, while Belgium's
Delhaize owns the Food Lion and Hannaford banners.
No financial details of the potential merger were disclosed and
the companies said the talks may not result in any deal. Based on
closing share prices Friday--before renewed speculation about a
deal surfaced--the new company would be valued at EUR22.91 billion
($25.79 billion.)
The potential deal comes at a time of upheaval in the retail
industry on both sides of the Atlantic. Consumers used to shopping
in discount stores during the recession haven't switched back to
more traditional retailers, while many are choosing to buy
groceries online.
The impact of the shift in habits has been substantial. In the
U.S., companies including Kroger Co. and Costco Wholesale Corp.--as
well as a surge in shopping at dollar stores--have eaten away at
the market share of Wal-Mart Stores Inc., the world's biggest
retailer. In Europe, similar forces have battered Tesco PLC, the
U.K. market leader that last month reported a full-year loss of
GBP6.38 billion ($9.95 billion), by far the steepest in its
history.
Ahold and Delhaize, like midmarket retailers world-wide, find
themselves caught in a squeeze between discounters like Costco and
high-end grocers like Whole Foods Market Inc. The two European
companies have been thinking about a combination for years,
reportedly having held talks in 2006, as they seek greater scale
and cost savings to take on the competition.
Analysts said a combination of Ahold and Delhaize could help
resist the discounter threat in the U.S. and Europe, while also
creating cost savings and a much wider spread of stores on both
continents.
In the U.S., the new company would form a formidable presence on
the East Coast, with a combined total of 2,034 stores, according to
analysts at Exane BNP Paribas. That would include 129 stores in New
York and nearly 500 in North Carolina.
"The big obvious benefit, especially in the U.S., is the scale
advantage the combined group will have in terms of purchasing
power," said Pradeep Pratti, an analyst at Citi.
Still, large-scale retail mergers are rare, and some analysts
were skeptical about the benefits of a tie-up. "Cost savings in
retail acquisitions or mergers are highest when there is a large
overlap and local scale economics improve," analysts at Bernstein
said in a note on Monday. "In this case there is very limited local
overlap.... We think this is a bad deal for Ahold investors."
David Payne, an analyst at Nomura, agreed that there are
relatively few synergies between the two companies' U.S.
operations. "We do believe there is at least shareholder appetite
for the simplification that combination (and later, perhaps,
separation of U.S. and European operations into two new companies)
would bring," he said in a research note.
A combination would create one of the largest food retailers in
Europe and the U.S. with around EUR54 billion in annual sales.
Based on recent estimates by Morgan Stanley, a combination would
have a market share of around 4.2% in the U.S., making it the
country's fifth-largest food retailer.
Both stocks soared on deal speculation Monday, with Delhaize up
14.5% and Ahold up 5.5%. In morning trading Tuesday, Delhaize was
up 1.1% to EUR83.84 and Ahold was up 1.8% to EUR18.51.
Maarten van Tartwijk contributed to this article.
Write to Peter Evans at peter.evans@wsj.com
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