By Peter Evans And Annie Gasparro
European grocery chains Royal Ahold NV and Delhaize Group--which
generate about 60% of their sales in the U.S.-- said they are
discussing a merger that could create one of the largest
supermarket operators in North America.
The companies gave no details in their brief statements
confirming the talks following European media reports. A combined
company would be valued at EUR22.91 billion, or $25.79 billion,
based on closing share prices Friday, before reports of a deal
surfaced.
Other retailers have bulked up recently in the U.S., where
increased scale has become crucial for growth and improved
profitability. Netherlands-based Ahold and Belgium-based Delhaize,
which had combined revenue last year of around EUR54 billion, or
$60.5 billion, generate most of their sales in the U.S., primarily
with stores stretching along the East Coast. Ahold operates the
Stop & Shop and Giant chains, as well as the online grocery
store Peapod, while Delhaize owns Food Lion and Hannaford.
An Ahold and Delhaize combination would create the
fourth-largest seller of groceries in the U.S. with about $46
billion in sales in the country last year, or 4.6% of the market,
according to Euromonitor International, and about 2,000 total U.S.
supermarkets. It trails Wal-Mart Stores Inc., which has 4,500 U.S.
stores, Kroger Co., which has about 2,600, and Albertsons-Safeway,
formed in a merger in January, with about 2,200 stores.
Traditional supermarkets in the U.S. have largely struggled to
differentiate themselves from a range of competitors. Discount
retailing giants like Dollar General Corp. and Wal-Mart have
gobbled up a huge share of grocery sales in recent years--though
Wal-Mart's business more recently has suffered. Whole Foods Stores
Inc. and its imitators lure high-spending consumers. And Kroger,
the biggest supermarket operator, has thrived using a strategy that
offers both lower-price items and more gourmet fare.
The environment has spawned several big deals. Supervalu Inc.
sold hundreds of Jewel-Osco and Albertsons stores to the private
equity group that later bought Safeway Inc. And Harris Teeter Inc.,
a high-end chain based on the East Coast, agreed to be bought by
Kroger in 2013.
"Ahold and Delhaize must merge to maintain competitive and
operational retail relevance and long-term viability versus
well-capitalized, highly capable competitors," said Burt
Flickinger, a retail consultant at Strategic Resource Group.
Shares in the European companies had soared on deal speculation
Monday, with Delhaize up 14.5% and Ahold up 5.5%. Shares in both
edged up again by more than 1% on Tuesday.
The companies said their talks are preliminary and might not
yield a deal.
While Ahold and Delhaize generally have limited overlap,
antitrust concerns in some parts of the U.S. could be a hitch,
analysts said. Ahold and Delhaize together would have 500 stores in
North Carolina and 129 stores in New York, according to Exane BNP
Paribas.
Competition concerns have been an issue in other food-related
deals recently, including Family Dollar Stores Inc.'s decision
earlier this year to merge with Dollar Tree Inc. rather than Dollar
General.
Mr. Flickinger said Ahold and Delhaize could have a good chance
for regulatory approval if they take the time to structure the deal
correctly.
Ahold and Delhaize 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.
"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.
David Donnan, food and beverage consultant at A.T. Kearney, said
acquisitions offer one of the few paths to significant expansion in
the U.S., where most major local markets already are saturated with
grocery stores. A merger also allows chains to leverage combined
warehousing, technology and other back-office operations and save
money.
But chains have to be careful not to lose the local dynamic that
makes shoppers loyal. "Otherwise, the risk is that you get so
efficient that you lose that focus on local consumers and that is
critical to being competitive," Mr. Donnan said.
Still, some analysts were skeptical.
"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."
Maarten van Tartwijk contributed to this article.
Write to Peter Evans at peter.evans@wsj.com
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