Case study

 Royal Ahold

by Professor Ian H. Giddy
New York University


Royal Ahold (Koninklijke Ahold NV; NYSE:AHO), a Zaandam, Netherlands-based company, is the largest food retailer in the Netherlands and the fourth largest in the US. The company operates over 3200 supermarkets, hypermarkets and specialty stores in 17 countries, with 1997 sales revenue of approximately 26 billion. Ahold has a presence in the US, Latin America, South/Central Europe and Asia. In the United States, Ahold is prominent along the East Coast, operating BI-LO, Tops Markets and Stop and Shop companies. In 1997, Ahold's US companies generated 55% of annual operating earnings.

The company has a reputation for good management, particularly in the area of consolidation. In a fragmented industry where price and cost are becoming paramount, Ahold has refined the centralization of purchasing and distribution, particularly in the U.S. where it is in the process of extending the leading-edge techniques of its Stop & Shop subsidiary to the other food retailing operations in that country. Recently it has expanded in Latin America, notably in Brazil, Argentina and Chile.

In mid 1998, as senior management sought to complete the acquisition of a large U.S. supermarket chain, Giant Foods, the Finance Department was asked to conduct a review of Ahold’s financing, and to make a recommendation on how the acquisition was to be funded.

Giant Food Stores, Inc., headquartered in Landover Maryland, is one of the best-known supermarket companies in the US with sales of $4.2 billion and net income of $71.2 million (FYE 2/98). The company operates 144 supermarkets in New York, New Jersey, Maryland, Virginia and West Virginia. The company's non-supermarket-support subsidiaries include stores operating under their own names as well as Cole Engineering, Warex-Jessup, Landover Wholesale Tobacco, LECO, Bursil, GFS Realty, GF McLean Shopping Center, Super G, Inc., Montrose Crossing, Friendship Macomb SC, Bayside Traffic Services, and the 85%-owned Shaw Community Supermarket. The company went public in 1959 and currently has 59.9 million shares outstanding. Once the deal was consummated, Ahold would own and operate 1000 food stores with annualized sales of $20 billion in the United States.

In April 1998, Ahold signed an agreement to purchase all of the voting shares of Giant Foods for $43.50 per share (approximately $ 2.6 billion). Of this amount, management decided to pay $400 million with its own cash. The remainder would be financed.

In your position as a banker to Royal Ahold, you have been looking for opportunities to strengthen your institution’s relationship with the company. The Treasurer has asked you to consider all the alternatives in the market today, and to have a meeting with senior officials to present your ideas. To assist you in this process, he has assembled some documentation on the company and the proposed acquisition. He has also put together a checklist of items to consider, although he has emphasized that your suggestions need not be limited to the questions raised here.


Considerations for Royal Ahold’s financing

Part 1. The Cost of Capital

  • How much debt does the company have? (Base your estimate in Dutch guilders or in US dollars, but do not mix up the two.)
  • How much equity?
  • What would you estimate is its cost of equity? (Base your estimate on Ahold's beta with respect to the U.S. market.)
  • What is its approximate cost of debt? (Be sure to be consistent in the currency of denomination that you use, and to take into account Ahold's effective marginal tax rate.)
  • What is Royal Ahold's cost of capital?
Part 2. Capital Structure
  • What is Ahold's actual debt-equity ratio?
  • What is Ahold's debt rating, and how would a change in the proportion of debt affect the company's cost of debt and the cost of equity?
  • How much debt should Ahold have in relation to equity?
Part 3. Designing the Acquisition Financing
  • Should Ahold raise funds by borrowing from banks or in the capital market in order to finance the remainder of the purchase price?
  • Should the acquisition be financed with debt or with equity, or some combination? What about convertible bonds, bonds with warrants, or index-linked bonds?
  • How much of existing liabilities are fixed-rate debt? Should any additional debt be fixed or floating?
  • How much of the company's new financing should be long term? Should Ahold use short-term bank debt or perhaps commercial paper as part of its financing?
  • In financing the Giant Foods acquisition, what mix of currencies should be used?
  • Should the company do a private placement or a public issue?
  • Should Ahold use currency or interest-rate swaps in conjunction with the financing? Or perhaps other derivatives such as caps, collars or swaptions?
  • Please prepare a proposal for the best financing package, taking into account the costs and benefits of different sources of funds.

Royal Ahold

Appendix 1: Excerpts from Royal Ahold's 1997 Annual Report

Royal Ahold

Appendix 2: Royal Ahold: Selected Financial Information

1. Geographic breakdown of sales and operating results
2. Shares outstanding and other information
3. Stocksheet

Royal Ahold

Appendix 3: Giant Foods: Selected Financial Information

1. Merrill Lynch pp 18-22
2. Earnings Update
3. Earnings Forecast
4. Union Problems article
5. Stocksheet

Giant Food Earnings Update

Giant Food Inc., a Washington based food-drug chain of 178 units, today announced unaudited sales and earnings for the 12-week and 24-week periods ended April 15, 1998 compared with the same period ended April 9, 1997. 

While sales growth slowed during the first quarter of Giant's fiscal year, a number of factors led to improved earnings compared with the previous year. A year earlier, the Company had introduced aggressive promotional programs in several of its territories which required substantial markdowns in that reporting period. At that time, Giant stated that while such programs had
an immediate impact upon earnings, the goal was to build the sales base. As margins have improved while sales gains have been retained, earnings have increased. Improved buying practices have also been a factor in increasing margins. On the expense side, however, lower sales growth pushed up selling, general, and administrative expenses as a percent of sales. As Giant enters the fall season, its planned programs and initiatives are anticipated to improve the Company's positioning and performance.

Giant has traditionally held an annual information meeting for the shareholders of its Class A Non-Voting Common Stock which is traded on the American Stock Exchange. No business is transacted at this meeting which is held to provide an annual review of the Company's activities for the benefit of the Class A stockholders. The Company has concluded that such an information meeting would be inappropriate in light of the pending cash tender offer of Koninklijke Ahold N.V. (Royal Ahold) for all of the Class A stock. 

With regard to the Tender Offer by Ahold, substantial progress has been made regarding store divestitures required by the Federal Trade Commission. Based on discussions with the FTC staff, a total of approximately 10 store locations (comprised of Giant-Landover and Giant of Carlisle stores) April be divested. Potential purchasers have been located for the store locations, and Giant is awaiting FTC approval of these purchasers. Ahold cannot proceed with the acquisition of Giant until it has obtained approval from the FTC. Giant is hopeful that it will conclude an agreement with the FTC staff within the next several weeks and proceed expeditiously towards a final closing of the transaction.

Giant now operates 178 stores, 141 of which are food-drug stores and three are free-standing drug stores. A year earlier, Giant operated 176 stores, including 133 food-drug stores, and three free-standing drug stores.

                          Subject to year-end audit
               (Dollars in thousands except for per share data)
                                   24 Weeks Ended
                                  April 15,  April 9,      Change
                                    1998        1997      $          %
Sales                           $1,947,304 $1,863,718  $83,586     4.5%
Income before income taxes          62,220     37,189   25,031    67.3%
Provision for income taxes          23,475     14,636    8,839    60.4%
Net Income                         $38,745    $22,553  $16,192    71.8%
Net Income per share                  $.64       $.38     $.26    68.4%
Earnings per share: 
  Basic                               $.64       $.38     $.26    68.4%
  Diluted                             $.64       $.38     $.26    68.4%
Shares used for earnings per share: 
  Basic (thousands)                 60,388     60,037
  Diluted (thousands)               60,843     60,375
Supplemental Data: 
 Effective tax rate                  37.7%      39.4%
                                   12 Weeks Ended
                                 April 15,  April 9,       Change
                                    1998       1997      $         %
Sales                             $963,639   $934,782  $28,857     3.1%
Income before income taxes          30,200     12,593   17,607   139.8%
Provision for income taxes          11,383      4,953    6,430   129.8%
Net Income                         $18,817     $7,640  $11,177   146.3%
Earnings per share: 
  Basic                               $.31       $.13     $.18   138.5%
  Diluted                             $.31       $.13     $.18   138.5%
Supplemental Data: 
 Effective tax rate                  37.7%      39.3%
                          Subject to year-end audit
                         CONSOLIDATED BALANCE SHEETS
                            (Dollars in Thousands)
                                                        As at
                                                April 15,     April 9,
                                                  1998           1997
Cash and cash equivalents                        $47,480      $31,471
Short term investments (A)                       192,975      142,262
Inventories                                      252,789      247,532
Other current assets                              90,711       92,913
    Total current assets                         583,955      514,178
Property, plant & equipment (net)                839,226      837,617
Property under capital leases (net)              113,563      108,784
Other assets                                      17,602       23,371
                                              $1,554,346   $1,483,950
Current liabilities                             $363,873     $338,803
Long-term debt-notes and mortgages                25,566       37,518
Long-term debt-obligations under capital leases  152,989      147,623
Other long-term liabilities                       87,825       83,103
Total liabilities                                630,253      607,047
Shareholders' equity                             924,093      876,903
                                              $1,554,346   $1,483,950
                            (Dollars in Thousands)
                                                 24 Weeks Ended
                                               April 15,   April 9,
                                                 1998         1997
Cash flows from operating activities: 
 Net income                                      $38,745      $22,553
 Depreciation and amortization                    45,276       45,706
 Other adjustments                                 1,800          750
Net increase in cash from changes in 
  operating assets & liabilities                  43,958       15,241
Net cash provided by operations                  129,779       84,250
Cash flows from investing activities: 
 Increase in short-term investments, net         (72,508)      (5,084)
 Capital expenditures                            (16,058)     (65,216)
 Other investing activities, net                  (1,600)        (271)
Net cash used in investing activities            (90,166)     (70,571)
Cash flows from financing activities: 
  Dividends paid                                 (23,788)     (23,113)
  Treasury stock transactions                      6,820        3,583
  Repayments of long-term debt                    (4,022)      (3,659)
Net cash used in financing activities            (20,990)     (23,189)
Net change in cash and cash equivalents           18,623       (9,510)
    (A) Short term investments are cash investments maturing more than three
        months from original investment date.
SOURCE Giant Food Inc.

Giant Foods: Long Term Growth Rate Forecast
Expected annual increase in operating earnings over the next full business cycle (3-5 years)

Union Says Giant and Royal Ahold Have to Honor Contract

WESTMINSTER, Md., April 13 /PRNewswire/ -- Today, UFCW Local 27, representing 27,000 Union organized food and commercial workers, conducted another in a series of rallies on the divestiture or sale of certain Giant Food stores to the huge foreign food conglomerate, Royal Ahold of the Netherlands. The rally was called to recognize the concerns of area residents and employees in Westminster, Maryland.

Anita Riley, Secretary-Treasurer of the United Food and Commercial Workers Local 27 addressed the morning rally, which was held at the Giant store in Westminster, and said the Union "stands firm with this community to protect good, family-sustaining jobs here at this store and to protect the economic health of our local communities."

Riley was speaking for Local 27 President Buddy Aprils, who had addressed two similar rallies last week in Carrol County. Aprils is in Chicago meeting with the leaders of other UFCW unions representing workers in Pennsylvania, New Jersey and Washington, D.C. He is also working with the UFCW International Union President, Doug Dority, to develop a coordinated campaign by the union to oppose the closure of unionized stores by Royal Ahold.

Mrs. Riley noted that the Union believes that Royal Ahold, not Giant, is "in control of this process and that it is Royal Ahold which is using the Federal Trade Commission review process to justify the sale of a number of Giant stores, while keeping open Martin's stores in the same neighborhoods."

She informed those in attendance that the UFCW Local 27 has taken steps in the last week to protect the jobs of union members and the communities in which they live and work, including filing a grievance. On Tuesday, the Union formally demanded arbitration on its grievance.

Mrs. Riley said that the Union has a strong contract with Giant and that "Giant has promised our members job security, decent wages and benefits." She also pointed out that if Giant sells any stores, the store must honor the contract, and that the Union will "make sure that Giant and Royal Ahold live up to this agreement."

In addition, Mrs. Riley charged that Giant has "moved too slowly" and demanded that Giant and Royal Ahold "produce needed information about the future of this and other stores."

Last week, UFCW Local 27 joined with elected officials to intervene in the FTC review process. United States Senators Paul Sarbanes and Barbara Mikulski, United States Congressman Roscoe Bartlett, Governor Parris Glendening and other elected officials have all contacted the Federal Trade Commission in defense of these stores.

Mrs. Riley told the participants at the rally that their participation "has gone, and will continue to go, a long way toward helping us win justice for our union members and your community. Our Union continues to work hard on this situation because -- WE DO CARE!"

SOURCE: United Food and Commercial Workers Local 27

Royal Ahold

Appendix 4: Credit Ratings and Credit Spreads: Selected Information

Royal Ahold

Appendix 5: Financial Market Conditions: Selected Information

1. Benchmark government bond yields
2. Typical Eurobond yields
3. Swap rates | | | | contact
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