Analysts: Tesco Should Buy Ahold for U.S. Biz
Analysts Peter Brockwell and John David Roeg
of ING believe Royal Ahold can be bought on the cheap, according to a Bloomberg report.
Tesco, they suggest, is the logical choice to buy Ahold and its grocery chains
on the East Coast.
“The U.S. market is too big to ignore, yet
any attempt to increase the scale of Fresh & Easy (Tesco’s chain on the
West Coast) could prove very risky,” the analysts wrote. “Ahold should be
viewed as a one-off opportunity to acquire an undervalued asset at a low
point in the U.S. consumer cycle.”
Buying Ahold’s U.S. businesses would
add about 700 grocery stores in the eastern part of the country to the 115
Fresh & Easy
stores Tesco has opened out West since 2007.
Ahold, which expects its U.S. business
to post a loss in the first half, has made some market share gains against
competitors including Safeway and Supervalu.
“A
tie up with Ahold would enable Fresh & Easy to benefit from more
favorable supplier terms, give it access to Ahold’s talented U.S. management
team as well as enable Fresh & Easy to scale back the size of its
overhead cost base,” the ING analysts wrote in a research note.
Other
analysts believe Ahold should be on the lookout for acquisitions based
on major savings achieved by the company over the past year. The company
is looking to achieve further cost-savings over the next fiscal year
that could be used to buy back shares or acquire other businesses.
A Tesco
spokesperson told Reuters, “We
never comment on market rumors and speculation.”
Discussion
Questions: Do you see Ahold as more likely to make an acquisition or
to be acquired? Does a Tesco acquisition of Ahold make sense based on
the two companies’ respective businesses in the U.S.?
Ahold could probably be bought cheap. They have been the incredible shrinking grocery retailer for the past few years. Disastrous failures with Tops, BI-LO, and Bruno’s along with internal scandals and blunders has brought Ahold to its knees, forcing them to sell off or close hundreds of stores. So I think we are all clear on what happens when a company is acquired by Ahold.
Since Ahold really hasn’t been on top their game with US retailing, I can’t see them acquiring more retailers only to destroy them in an A&P-esque manner. Most likely, Ahold should be acquired and their management team replaced. Ahold bragging about gaining market share against Supervalu and Safeway isn’t saying much. Wal-Mart, Wegmans, and Aldi are doing that every day on the Eastern Seaboard and it goes ignored.
I think the competition would love to see Tesco buy Ahold. Tesco seems so confused on how to cater to the US market that we might just see Ahold implode. Imagine the mess they could make dealing with the unions, disgruntled employees, low sales per square foot stores…and then have some misguided notion they could take business away from US based retailers like Wal-Mart, Wegmans, Price Chopper, Aldi, and Shop-Rite.
Purchasing Ahold stores would give Tesco the opportunity to test the grocery store concept in the US. Adapting the Fresh & Easy concept to the US marketplace has been a challenge because adapting to West Coast consumer tastes, behaviors, and attitudes has taken time. Purchasing Ahold’s store would provide a new challenge to Tesco by having to adapt a new store concept to a different group of consumers. If Tesco is planning to expand to that format and those consumers, it makes sense. It is a strategic choice for Tesco.
Shedding under-performing assets is often a good strategy; buying them is a crap shoot. No question that Tesco could become more important in America via an Ahold acquisition but it might prove a very expensive way to buy some very ephemeral status.
Forget acquisitions by Ahold. Tesco could buy it on the cheap. But it would only make sense if they are willing to revamp the entire operation. Even then, is it worth it, given Tesco’s interests in other parts of the world?
Ahold is a shrinking violet, wrinkling and wilting a bit. Their current game plan is bland and tilting toward possible oblivion. If Ahold were to make an acquisition, it would be more in the spirit of cloudy tradition than enlightened erudition. Ahold, to stay in the American retail food game, should revitalize their game plan and their playbook.
If and when Tesco clears its head regarding how it wants to advance in the American marketplace, there are safer ways and means of achieving that objective over here than taking over 700 or so Ahold-owned stores. With or without ING’s opportunistic advice re acquiring Ahold, may Tesco “think about it” long and hard before it considers acquiring Ahold stores as their future pathway to success in the colonies.
I have long thought that Tesco and Kroger would be the marriage made in heaven. Both are very progressive in their own domains–global and US. This would represent a very significant advance for Tesco in the US, and would open the rest of the world to Kroger.
Tesco has made major moves over the past twenty years, from quite far back in the pack of global retailers, to number 3, behind Carrefour and Walmart. Ahold, on the other hand, has been dropping like a rock. Carrefour is too big, and too competitive with Tesco to be a serious potential partner. And they are too big for Walmart to acquire.
Carrefour and Kroger might also work, but I think Tesco and Kroger align better. And further on Ahold (USA), there is a reason the potential price is low, and it doesn’t necessarily spell value. All value (and liability) isn’t necessarily reflected on the books.
Some of the Ahold valuation is due to operations but their performance is also being hurt by a declining dollar.
Jewel Tea at one time owned a Mexican chain that did very well. However, Jewel’s profits were periodically hit when the peso was devalued. Jewel finally disposed of the chain to gain earnings stability. While the US holdings look cheap today, they will be much cheaper when the world gets financial indigestion from all of the dollars being printed and “fed” into the system. Ahold will only be a good deal for Tesco if the market has fully discounted the Ahold price based on the future value of the dollar against the Euro.
As for Tesco acquiring Ahold, I just don’t see the value. Ahold’s U.S. stores are a completely different format than Tesco’s Fresh & Easy stores in the West. Tesco recently took a break from opening new Fresh & Easy locations while it figures out how to make the format profitable–suddenly throwing another 700 differently-formatted stores into the mix won’t make that challenge any easier.
I am, however, intrigued by Herb Sorensen’s comment about Tesco and Kroger being a better match. To add to Herb’s points, I think the biggest commonality that Kroger and Tesco share is their full embrace of targeted shopper marketing. The deep (and exclusive) relationship each chain has with dunnhumby drives both chains’ strategy and decision making, so they are already strongly aligned in their approach to the market and to their shoppers. Hence, the risk of culture clash that so often hamstrings post-M&A companies would be much lower.
I have long said that one way or another, Tesco will be a major player in the US. They are very good at what they do on the international front and will indeed figure out a sustainable model here in the States. Is Ahold the answer? Perhaps not. But without full visibility to the salvageable value that may be present in an aging and lackluster operation such as Ahold, I would never say never. My personal belief is that if the US operation can be purchased on the cheap (as one other esteemed panelist commented) and Tesco can whack away the weeds and find fertile ground underneath, it may become a brilliant business acquisition and further their US market penetration goals.
Tesco buying Ahold; I don’t see it. Ahold has too many inherent problems for this to make sense. But Tesco purchasing Whole Foods, now that would be really interesting. It would allow Tesco to have a bigger retail footprint in the US, but still remain a specialty retailer in the States.