Amsterdam/Brussels, Sept 22 - In a bid to stave off a shareholder revolt, Dutch retailer Ahold may be mulling a merger with Belgian peer Delhaize, but a tie-up would be difficult and talks can only be in the early stages.
Ahold, the world's fourth-biggest food retail and foodservice group by sales, this week was reported by Dutch newspapers and the Financial Times to be considering an all or part merger with smaller Delhaize in order to defend itself against shareholder activism.
Industry and financial sources have confirmed tentative contact has likely been made, triggered by hedge funds Paulson and Centaurus's efforts to whip up shareholder support to break Ahold's flagging U.S. operations from the rest of the group.
Ahold, which is more than twice the size of the Belgian company, and Delhaize have declined to comment.
Both groups generate most of their sales in the United States and are not active in each other's smaller home markets in Europe, making them seem at first sight like a fairly complementary fit.
Yet, pitfalls are plenty for any deal. Not least, why Delhaize would want to marry its solid business with Ahold, which still bears the scars from an accounting scandal two years ago.
"Everything that's been talked about could happen ... but it could also be a lot of noise," one senior banking source said.
For Ahold, a deal would boost its purchasing power in the U.S. and create synergies spanning distribution to staff.
The U.S. units under attack by the activists make up more than 70 percent of Ahold's sales but margins have been squeezed in the face of rising competition and high energy prices.
People close to the situation have said Ahold, which is due to present an industrial review this year, is desperate to calm the shareholder revolt and considering a merger with Delhaize was an "extreme measure" in its arsenal.
Another financial source said Centaurus could back a deal with Delhaize, widely regarded to be a better managed company.
LIKELY SCENARIO
"It is a likely scenario," Kepler Securities analyst Ton Van Ooijen said. "But this is not the only scenario to get the hedge funds to keep quiet. There are others."
While a tie-up could clearly help Ahold avoid activist pressure, the advantages to Delhaize are less distinct. It is in the midst of restructuring its U.S. operations and is already digesting several major acquisitions.
Ahold also trades at 16.5 times forward earnings compared with Delhaize's 14.8 times and a multiple of 16 times for the DJ Stoxx European index of retailers.
"If you look at the numbers, they don't add up. It's a strange story. Some conversations may have been held but then everyone talks to everyone," said a source close to one of the companies.
Delhaize acquired Victory Supermarkets and Cash Fresh in the United States in the past two years. It is revamping stores across the country, a move that started showing progress in the second quarter with better-than-expected sales figures.
As far as Belgium is concerned, Delhaize is already stretched by a cut-throat price war with discounters and has had to slash prices across its product lines, crimping margins.
A combined group could raise competition issues with U.S. authorities as both companies operate on the east coast of the United States.
Executives have also played down the prospect of more buys. Beyond a stated interest in U.S. retail chain Albertsons Inc, management have said they are looking only for fill-in or bolt-on deals.
Ahold's ongoing restructuring and Delhaize's smaller market capitalisation and higher gearing would make it difficult.
And the worst consequence is that with the merger swirling, both would be likely to lose sight of their main aim -- staying in favour with today's picky, tyrannical consumer.
"I don't see the benefits of getting bigger and bigger. I think a merger would take the focus from running the shops. It can only be disruptive," Kempen analyst Erwin Dut said.