Delhaize Group’s rising stock may have made it the right size for a merger with Royal Ahold NV.
The Food Lion chain owner climbed more than 30 per cent in the last year through the beginning of May as it improved sales and sold underperforming stores. The shares added another 16 per cent this week on the news that Delhaize is in talks to combine with Dutch rival Ahold.
Delhaize’s gains have helped close the gap between the Belgian company’s market value, at about $10 billion, and that of Ahold, at almost $19 billion. In February, that differential shrank to the narrowest since 2009, according to data compiled by Bloomberg.
“With Delhaize in better shape, Ahold looking in need of a little extra fuel in the tank, and with the retailers’ valuations relatively balanced, a deal looks more credible,” John Kershaw, a London-based analyst at Exane BNP Paribas, wrote in a report on Monday.
The narrowing value gap makes it easier to structure a transaction more like a merger of equals - even if not strictly 50-50, according to James Anstead of Barclays. That’s probably necessary for the two longstanding grocers to agree to it, he said.
Delhaize may not want to be viewed as takeout prey and Ahold may not want to pay a pricey premium. An overhaul of Delhaize’s board that loosened its ties to the founding family also increases the odds of a merger that’s been speculated since at least 2006.
The combination would be the biggest for the food retail industry in almost a decade and analysts project it could yield about €500 million in synergies, based on the average of four estimates.
With those cost-cutting benefits, an all-stock merger with no premium would be more than 20 per cent accretive to Ahold’s 2015 earnings per share, according to data compiled by Bloomberg. That’s part of the reason why Ahold’s shares are rising too.
An alternative to a merger is a takeover of Delhaize by Ahold. James Grzinic of Jefferies Group estimated an acquisition price of €115 a share for Delhaize, an additional 37 per cent premium to the current stock price. If the synergies stayed the same, a purchase at that valuation would still be accretive to Ahold.
The amount of synergies derived from a merger may turn out to be less than some analysts are predicting because of the challenges of integrating Delhaize’s mostly non-union US operations with Ahold’s unionised chains, said Charles Allen, an analyst at Bloomberg Intelligence. The differences in the companies’ distribution systems also may have an impact, he said.
News by Bloomberg, edited by ESM
