A case study in corporate finance.
[Preliminary]
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.
Memorandum
Considerations for Royal Ahold’s financing
Part 1. The Cost of Capital
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
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 |
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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
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. GIANT FOOD INC. FINANCIAL HIGHLIGHTS Subject to year-end audit CONSOLIDATED SALES AND EARNINGS (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 60,375Supplemental 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% GIANT FOOD INC. FINANCIAL HIGHLIGHTS 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 CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) 24 Weeks Ended April 15, April 9, 1998 1997Cash flows from operating activities: Net income $38,745 $22,553 Depreciation and amortization 45,276 45,706 Other adjustments 1,800 750Net increase in cash from changes in operating assets & liabilities 43,958 15,241 Net cash provided by operations 129,779 84,250Cash 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. |
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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
1.
Appendix 5: Financial Market Conditions: Selected Information
1. Benchmark government bond yields
2. Typical Eurobond yields
3. Swap rates