Spanish sell-off at heart of Ahold recovery plan

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Ahold is to sell off its Spanish retail operations as part of a
long-awaited recovery plan announced today. The programme will also
include a €2.5bn rights issue which will help pay down debt, and
significant efficiency savings designed to restore the group's
financial strength.

Nearly a year after Dutch retail group Ahold​ confirmed an accounting fraud at a number of its operating units, the company's new chief executive has finally unveiled his vision for returning the ailing group to its former glory. At the heart of the strategy is the sale of its Spanish supermarket business.

Anders Moberg, the ex-IKEA man brought into replace Cees van der Hoeven as CEO of Ahold earlier this year, has taken his time in drawing up the recovery plan, with investors and analysts alike expecting an announcement earlier in the summer.

But the wait appears to have been worth it, with Moberg today announcing a number of sweeping changes to the company, including substantial disposals and a €2.5 billion rights issue.

The Road to Recovery programme sets out Ahold's objectives for rebuilding the value of the company over the next three years, according to Moberg, and will focus on four key areas: restructuring the food retail operations; recovering the value of US Foodservice, the unit at the heart of the accounting scandal; reinforcing accountability, controls and corporate governance; and restoring Ahold's financial health.

"Ahold has been through the most challenging nine months in its history. In spite of this, our core operating companies have shown resilience and have retained their leading market positions. With the financing plan that we are proposing, I am pleased to say that we finally draw a line under this difficult year. We can now focus wholeheartedly on strengthening the competitiveness of our business,"​ said Moberg.

"At the same time, we are in the process of setting the highest possible standards for accountability, controls and corporate governance, to keep Ahold's investors, customers, employees and partners secure in the knowledge that this company is being run in their best interests. Today we launch the new Ahold."

In more concrete terms, Moberg said that he expected the food retail business to generate sales growth of 5 per cent a year after disposals from 2005, with the ongoing restructuring of the business turning what he said had traditionally been a loose affiliation of separate operating companies into one streamlined group.

The focus will be on those Ahold retail units which are the number one or two players in their respective markets - an indication that the businesses in eastern Europe and Asia are unlikely to be put up for sale, for now at least - and any units which do not meet this criteria will be sold, he said.

This was the rationale behind the Spanish sale. The 628-strong Ahold Supermercados group generates sales of around €2 billion, but its fascias - Superdiplo excepted - are among some of the smaller players in a market dominated by French groups Carrefour and Auchan - both of whom, along with perhaps Tesco and Casino, are likely to lead the list of potential buyers.

"Although Ahold believes in the viability of its Spanish retail operations, the company does not foresee the ability to develop a sustainable leadership position in Spain within the three to five years specified in its strategic criteria. Ahold expects its Spanish business to have a brighter future outside the group,"​ Moberg said.

Disposals - in Spain and elsewhere - are expected to generate at least €2.5 billion in proceeds by 2005, Moberg said, adding that the restructuring of the retail business would deliver €600 million in annual cost savings and €200 million in capital expenditure and working capital efficiencies by 2006. The changes will require an estimated one-off investment of €285 million spread over the next three years, however.

Foodservice integration

Some observers had suggested that the fraud at US Foodservice would be too hard for Ahold to shake off and that it would opt to sell off the business as part of its recovery plan. But Moberg clearly believes that the potential to be gained from a properly-run US Foodservice business far outweighs any lingering concerns about previous management there.

"US Foodservice is an under-managed business, but it has a great market position and great potential to improve its financial performance,"​ he said. "The company holds the number two position in the growing $180 billion wholesale foodservice market. However, US Foodservice's integration process was never properly executed. Larry Benjamin, the new CEO, is implementing a three-step plan for recovering the value of US Foodservice.

"Although 2003 is clearly a lost year, we have significant opportunities to restore margins and raise them towards those of our competitors."

As far as restoring Ahold's financial health is concerned, the disposal and cost cutting programmes will combine with the proposed rights issue to help substantially reduce the group's debt. At the same time the company has secured two new credit facilities - €300 million for Albert Heijn and $1.5 billon for Stop & Shop.

Tough first half

Ahold has also reported an 11.8 per cent drop in first half sales to €30.3 billion, impacted primarily by lower currency exchange rates. Operating profit before goodwill and exceptional items was €677 million, a decrease of 48.4 per cent compared to the same period last year, affected not only by the currency problems but also by lower earnings at US Foodservice and some of the group's European retail units, as well as by higher audit, legal and consultancy fees.

However, there was one positive development, with net losses of €142 million in 2002 converted to profits of €60 million in the first half of 2003.

"The results in the first half-year of 2003 were disappointing and impacted by the diversion of our management as a result of the events surrounding the announcements [of fraud at US Foodservice] and the related investigations,"​ said Moberg.

Excluding the impact of currency translation, sales for the half were 3.6 per cent higher than in 2002, primarily due to a 3.2 per cent increase at the US retail business and a 1.7 per cent gain from the European retail arm.

However, sales at US Foodservice declined by 0.7 per cent, the company said.

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