Breakup talk swirls around Tops' parent
Jul 03, 2006

One scenario sees Royal Ahold split into three entities; By MATT GLYNN; News Business Reporter
7/2/2006
Royal Ahold NV gets two thirds of its sales from its U.S. supermarkets.

Far from Tops Markets' supermarket shelves, hedge funds are reportedly maneuvering to break up Royal Ahold, the chain's Netherlands-based parent company.

A British publication called The Business recently reported that a London-based hedge fund, Centaurus, had built a 4 percent stake in Ahold. The report cited unnamed sources who said Centaurus was leading a group of investors including U.S.-based Paulson, which had built a similar-size stake, small enough to avoid disclosure rules in the Netherlands.

One goal, the story said, might be to break Ahold's holdings into three entities: U.S. retail, European retail and U.S. Foodservice, the company's Maryland-based wholesale food distributor.

Supermarket industry observers said it is difficult to predict whether such a breakup will occur, and even if it did, how Tops would be affected.

Ahold owns three other U.S. supermarket chains, and Tops operates as a division of one of them, Giant of Carlisle, Pa.

Ahold and Centaurus are not commenting on the report. Ahold periodically has been the subject of takeover talk since an accounting scandal three years ago caused upheaval at the Dutch retailer.

Bryan Roberts, an analyst with Planet Retail in London, said the hedge fund story seemed speculative, but that if there was any substance to it, Tops was unlikely to feel much impact.

If such a breakup were forced on Ahold, Roberts predicted that the U.S. retail operation, which includes Tops, would continue as an independent or semi-independent entity of Ahold. He believes it would be "business as usual" for the U.S. retail operations, regardless of what happens to Ahold's European operations or U.S. Foodservice.

"Given the amount of effort and investment that have gone into the integration of buying, [information technology], private label and marketing in Tops, Giant-Landover, Giant-Carlisle and Stop & Shop, it would appear that any further downsizing of U.S. retail would destroy these synergies and would not create a good deal of value for shareholders," he said in an e-mail interview.

Roberts said he was doubtful that one company would be able or willing to acquire all of Ahold's U.S. supermarket chains. Those chains extend across the Northeast and mid-Atlantic, a formidable bid for a single buyer.

Kevin Coupe, who publishes a Connecticut-based newsletter about retailing, said the talk of breaking up Ahold is remarkable for a company that was once viewed as a model for acquiring regional chains and operating them profitably.

Coupe said he couldn't forecast what might happen to Ahold, but he said dividing the company into three parts would probably be easier for Ahold than selling off the pieces. "They couldn't sell the whole U.S. retail entity probably to one buyer," he said.

J.P. Morgan Chase analysts have cited another reason that Ahold is unlikely to be taken over. They said the company's debt is $1.9 billion higher than suitors might have estimated.

Burt Flickinger III, a consultant with Strategic Resource Group in New York City, said it did not appear the hedge funds that are reportedly focusing on Ahold had enough power to influence Ahold's board of directors.

But he said such moves can generate enough attention to cause an increase in the stock price of that company, as initially occurred with Ahold after the news report was released.

Tops remains the Buffalo Niagara region's market-share leader and is only a slice of Ahold's international retail holdings. But Ahold's U.S. companies collectively generate about two thirds of Ahold's total sales, so their results are a leading concern for Ahold.

Ahold's profits in the first quarter rose 76 percent from a year ago, bolstered by strong results at U.S. Foodservice. But Tops' identical-store sales fell 6.5 percent from a year earlier, dragged down in part by the performance of its northeast Ohio stores, according to the company.

Aside from speculation about Ahold's future, Tops is facing tougher scrutiny from its bosses. Anders Moberg, Ahold's chief executive officer, has said the company is reviewing "underperforming assets," and has identified Tops as among them. The review is supposed to be finished in the fall, but Moberg hasn't indicated what steps Ahold might take after that.

Tops through store closings and sales has reduced its New York state presence to focus on its core Buffalo and Rochester markets. In the Buffalo area, it is pouring $20 million into improving 11 stores this year, and plans to invest up to $40 million next year on an additional 12 to 15 stores. The chain has also rolled out additional customer-friendly technology in some stores.

"It looks like Tops is doing a good job of rebuilding its business in the original markets," Flickinger said.


Bloomberg News contributed to this report.


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