UK: Tesco should consider buying Ahold, ING analysts say

Tesco Plc, the U.K.’s biggest retailer, should consider buying Royal Ahold NV at a cost of about 15 billion euros ($22.2 billion) to accelerate its U.S. expansion, ING analysts wrote in a note.

Ahold, the Amsterdam-based owner of Stop & Shop and Giant supermarkets in the U.S., is “cheap on all metrics,” which may lead to takeover interest, analysts Peter Brockwell and John David Roeg wrote in a note dated Oct. 30 and received today. Tesco runs Fresh & Easy shops in the world’s largest economy.

“The U.S. market is too big to ignore, yet any attempt to increase the scale of Fresh & Easy could prove very risky,” wrote the analysts, who recommend buying both companies’ shares. “Ahold should be viewed as a one-off opportunity to acquire an undervalued asset at a low point in the U.S. consumer cycle.”

A Tesco spokesman said the Cheshunt, England-based company would not comment on speculation. He declined to be identified. Ahold spokesman Jochem van de Laarschot declined to comment on takeover speculation or on whether Tesco had made an approach.

Ahold rose 11.5 cents, or 1.3 percent, to 8.70 euros in Amsterdam trading, raising the retailer’s market value to about 10 billion euros. Tesco shares added 1.6 pence, or 0.4 percent, to 408.95 pence in London.

Tesco should be able to finance a bid of at least 12.8 euros per Ahold share, potentially adding as much as 20 percent to per-share earnings in 2011, the ING analysts said.

Savings Program

Third-quarter sales at Ahold’s U.S. Stop & Shop stores open at least at year rose faster than those of competitors including Safeway Inc. and Supervalu Inc. Tesco has said its U.S. unit will likely report a full-year loss similar to last year’s $259 million, after posting a trading loss in the first half.

“A deal with Ahold would be less likely to involve Tesco overpaying,” the ING analysts said in the note. “It could acquire a highly cash-generative business.”

Today’s ING report comes 16 days prior to Ahold’s third- quarter earnings report, an event at which Chief Executive Officer John Rishton said he’ll reveal a “very sizeable” cost- savings program, following 500 million euros of savings this year. Fellow analysts, including Petercam’s Fernand de Boer, have said Ahold should spend its cash on making acquisitions or buying back stock, if it wants to avoid becoming a bid target.

700 Stores

“Our business is growing, we have met our long-term growth objectives,” Ahold’s Van de Laarschot said today. “We have a very strong financial position.”

Buying Ahold would add about 700 grocery stores operating in the eastern U.S. to Tesco’s 115 Fresh & Easy stores it has opened since 2007 in western states, including California and Arizona. Together with Albert Heijn, the biggest supermarket chain in the Netherlands and Ahold’s businesses in central and eastern Europe, that would boost Tesco’s full-year sales in 2011 to 96.9 billion pounds ($159 billion), the ING analysts said.

“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,” ING said.

Ahold shares trade at a discount of about 40 percent to European rivals and 25 percent to U.S. competitors, based on enterprise value versus estimated earnings before interest and taxes, according to ING. Carrefour SA is Europe’s biggest retailer with 87 billion euros in annual sales.

Buying Ahold might add 493 million pounds to an enlarged Tesco’s earnings by fiscal 2011, ING estimates. Tesco could finance a deal by cash proceeds from property sales, issuing equity or selling Ahold assets, the analysts said.




Source: bloomberg.com

Publication date: 11/3/2009

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