Rabobank: "70 % chance for Ahold – Delhaize merger"

Ahold must act very diplomatically

“It is now or never” is how Rabobank’s financial analysts describe the merger talks between Delhaize and Ahold. “Both were indeed close to a merger in 2006 and we have heard plenty of rumours, but a deal seems closer than ever, as the support of all parties involved is considerably higher than in 2006”, Rabobank’s report – subtly called “Romance tussen de schappen” (Romance between the shelves) – said. 

The negotiators’ biggest challenge is to agree on Ahold and Delhaize’s evaluation, which will then lead to a price shareholders can accept. In that regard, Ahold will have to act very diplomatically, because any whisper of a hostile take-over will only jack up the price while its chances for success, dependent on the cooperation of all management teams so that product ranges and IT infrastructure (to name a few obstacles) can integrated, will be minimal at best.

The bank believes Ahold took the first step to start merger talks, backed by an extensive preparation and a detailed plan. Analysts also feel this plan has taken into account all the sensitive issues at play: Rabobank advises a deal based on exchanging shares in the new enterprise, which better fits an agreement between equals instead of Delhaize’s acquisition by Ahold.

Such a deal would also eliminate any goodwill costs, while Ahold won’t have to get into debt to move things along. “Delhaize’s shareholders might even be enticed further by offering a combination of cash and shares”, the report states.

“Momentum much better than in 2006”

The bank feels there is about a 70 % chance the Delhaize – Ahold merger will go through, with two new Dutch CEO’s at the head of each company, who know each other well and have collaborated before. There is also a larger strategic need to take a huge leap forward, more so than in 2006 according to the bank.

Back then, Ahold was still recovering from a series of accounting scandals that surfaced in 2003. Its CEO at the time, Anders Moberg (former IKEA employee) was more of a financial wizard than an actual retailer. Delhaize on the other hand catered more to the family holding’s sensitivities back then, which resulted in CEO Pierre Olivier Beckers’ reluctance to take any decisive actions.

“Now, both companies are being led by experienced retailers who are fully aware of what the company needs to do to expand the business and return to structural growth, both volume and margin-wise”, analysts wrote. “Both portfolios are a better fit nowadays and the advantages of this deal have such a rational power that potential cultural and political barriers can be overcome, just the same way it can solve any possible valuation discussions.”

Delhaize can recover more quickly thanks to Ahold

Delhaize is a more interesting party to Ahold than any of the other possible candidates: “You had underperforming targets like A&P, retailers who were at the end of their lifecycle like HEMA or expensive retailers like Harris Teeter and Pick & Pay. Delhaize offers the most growth potential, by far.” Ahold’s experience online and in convenience retail could open up doors for Delhaize as well.

The bank also feels Ahold is the ideal partner for Delhaize Belgium to recover faster, particularly when they can get better purchase conditions. Rabobank thinks better conditions could help save up to 550 million euro, which can then be invested improving both formulas’ price perception. A gross profit margin recovery could reach 2 or 3 %. By comparison, Delhaize still managed a 5 % gross profit margin in 2010.

Improved labour relations could also help improve the Belgian recovery thanks to a recent agreement between Delhaize and the labour unions. No additional measures are expected to further anger labour unions. The report also states Ahold will adjust its Belgian Albert Heijn expansion plans to spare Delhaize in that regard.

“Ahold’s online belongs to the top 3 in the world”

In 2015, the Ahold-Delhaize combination could have a 61 billion euro turnover, a 2.3 billion euro gross profit and a 1.3 billion euro net profit. Its United States operations represent 65 % of its turnover and 64 % of its gross profit, which means that a merger would result in a dominant supermarket retailer both in the United States and in the Benelux. In Southeast Europe, the group would have leading positions in Greece, the Czech Republic, Romania and Serbia, while the region would represent 8 % of total turnover and 7 % of the gross profit.

Ahold will be the leading contributor online: “We consider Ahold’s online to belong to the top 3 in the world when it comes to online food sales, both in turnover (0.9 billion euro) and online capabilities”, the Rabo analysts said. With plenty of online and offline synergies, the pressure on the negotiators to strike a deal will only increase.