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Ahold, Delhaize shares soar on reports of merger talks

 

Royal Ahold NV and Delhaize Group surged in European trading after reports that the Dutch and Belgian grocers are in the early stages of merger talks, a deal that would bolster their Stop & Shop and Food Lion chains in the U.S.

Delhaize rose as much as 19 percent to 86.08 euros, the biggest gain in almost a dozen years, while Ahold advanced as much as 10 percent to 18.97 euros, the most since 2008. That boosted the companies’ respective market values to 8.9 billion euros ($9.8 billion) and 17 billion euros.

Ahold and Delhaize are prominent in the Maryland grocery store market.

Both companies get about 60 percent of sales in the U.S., where competition among retailers has intensified. Together, they would control about 4 percent of the U.S. grocery market, analysts at Natixis estimate, and would have a presence along the entire East Coast. In Europe, a combined business would be the fourth-biggest food retailer, Natixis said.

“Ultimately, both groups would benefit from a transformational deal in order to improve their structural prospects, and that is why we expect the likelihood of a combination to be high,” James Grzinic, an analyst at Jefferies in London, said in a note.

Talks between the companies are at a preliminary stage, Belgian newspapers De Tijd and L’Echo reported May 9, citing several people they didn’t name. The retailers haven’t reached the stage of discussing price or structure, according to the reports. Ahold and Delhaize both declined to comment.

Cost Savings

A merger would create savings of as much as 600 million euros, according to analysts at Jefferies, helping deflect intensifying competition in the U.S.

Ahold’s Giant Landover chain, which operates in Virginia, Maryland, Delaware and Washington, D.C., has been hurt by competitors opening new stores, while the market in New England has been stagnant, the company, which owns Stop & Shop, has said.

Delhaize’s Food Lion faces challenges from Wal-Mart Stores Inc.’s addition of smaller-format grocery stores. Harris Teeter, now owned by Kroger Co., is also cutting prices.

“We have believed for a long time that both Delhaize and Ahold would struggle to defend margins in the face of increasing U.S. competitive attrition,” Grzinic said.

A merger would be unlikely to run into many antitrust difficulties, according to the Natixis analysts, being limited mostly to an overlap of stores in Massachusetts.

“Geographically the companies have a better fit than a few years ago,” Joost van Beek, an analyst for Theodoor Gilissen Bankiers, said by phone.

Earlier Speculation

Speculation about a possible merger of Ahold and Delhaize dates back to at least 2007. Since then, both companies have sold assets and changed leadership.

The most likely background to the most recent speculation may be an approach by Ahold for Delhaize, according to Jefferies. By contrast, Barclays analysts said any deal would probably be structured as a genuine merger because Ahold may be reluctant to pay the premium that a seller would demand.

An offer for Delhaize would be the biggest purchase in Ahold’s history. The Belgian grocer’s market value is more than twice the $3.4 billion Ahold paid for U.S. Foodservice in 2000, an acquisition that led Ahold to the brink of bankruptcy three years later due to accounting fraud at the business.