Sunday 25 September 2016

Some big supermarket mergers could be in store

John Lynch

Published 27/07/2015 | 02:30

Dick Boer, CEO Ahold
Dick Boer, CEO Ahold

The supermarket sector is constantly changing and is a real challenge for an investor in the big international stocks. In Britain, the Tesco dilemmas, along with the depredations of the German discounters, has made stock-picking in the grocery business a pure guessing game.

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The only realistic bet is that some consolidation can be expected. So when I heard of supermarket rationalisation, my only surprise was that it wasn't happening in Britain (just yet). It's in Euroland and involves a company that has been a favourite of this column for some time.

The Netherlands outfit Ahold, which we put under the microscope a few months back, has proposed a merger with Delhaize, the Belgian supermarket group, so creating the fourth-largest European supermarket chain.

Delhaize would not be a name that trips readily off the Irish tongue. (Indeed there is a danger the name might be confused with Gina, Dale Hayes and the Champions, the Cork-based stalwarts of the showband era.) But no, this Delhaize is far from being a cabaret performer.

It is a Brussels-based operator of supermarkets and convenience stores in Belgium, US, Luxembourg, Greece, Serbia, Romania and Indonesia. It has 3,400 stores, 20 million customers per week and 150,000 employees.

It is also burdened with falling profits and challenging market conditions, especially in the home market in Belgium where deflation is a real problem.

The clear rationale behind the merger lies in Delhaize's division in the US, its biggest market, which accounting for two-thirds (€14bn) of total revenue. It is the group's star performer, with nine consecutive quarters of growth, and contributes 70pc of group profits. Most of the company's stores are concentrated on the east coast of America, from Maine to Georgia, covering 15 states.

As the United States is a substantial and diverse market, Delhaize operates two formats; one for the northeast, called Hannaford, and another named Food Lion for the mid-Atlantic and southeast. Food Lion is the largest, with over 1,000 stores, and Hannaford has 200.

Delhaize's US operation should be a neat fit with Ahold's US Stop & Shop chain. They only overlap in five states and the new entity will become the fifth-largest supermarket chain in the US.

Delhaize's Southeastern Europe operation, which includes Greece, Romania and Serbia, saw last year's revenues flat at €3bn, yet profits increased marginally.

As might be expected, last year was 'challenging' in Greece, Romania was positive and Serbian sales were static. Surprisingly, last year Southeastern Europe profits exceed those of Belgium with considerably less revenue - an indication as to the extent of the Belgian problem.

One of the positives for Delhaize is that it is first or second position in most of its markets, which will be helpful in the new merged company. Last year, sales were €21bn and the return on capital was 6pc (Ahold is 9pc).

Some investors have been aware of the attractiveness of Delhaize shares, pushing them to a ten-year high of €90 earlier this year. It is currently in the low 80s. Three years ago ,they were €25.

Its market cap of €8.3bn has doubled in the same 10-year period; the new firm will probably have a value of €25bn. Some analysts see an arbitrage opportunity in Delhaize between now and the conversion of shares.

The combined group will now have 6,500 stores, 50 million customers each week and 375,000 employees. The deal is being sold as a merger of equals, but a more realistic interpretation is that it's an Ahold takeover.

The Dutch firm will end up with 60pc of the equity. The tie-up should have savings of €500m and be completed by mid-2016 if regulators agree.

Some unfinished business for Delhaize is its involvement with a number of retailers and manufacturers in price-fixing of perfumes, toothpaste and other household products, which has attracted the attention of the Belgium Competition Authority. This follows a similar case in France, where penalties of more than €1bn were imposed. Interesting times for Delhaize.

Nothing in this section should be taken as a recommendation, either explicit or implicit, to buy any of the shares mentioned.

Irish Independent

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