Royal Ahold NV and Delhaize Group confirmed that they have entered merger talks, after speculation that the European grocers were negotiating sent their shares surging early this week.
The discussions are “preliminary” and may not result in a transaction, Ahold and Delhaize both said in separate statements.
The stocks surged Monday 11 May, after weekend reports that the Dutch and Belgian retailers were in the early stages of talks to merge. Ahold rose 5.5 per cent and has a market value of €16.3 billion, while Delhaize gained 15 per cent and is now valued at €8.6 billion.
A combination would create the fifth-largest food retailer in the US, with sales of over €54 billion and more than 4 per cent of the US grocery market, according to analysts at Natixis.
In Europe, the merged business would become the fourth-biggest food retailer, Natixis said. A deal is more likely now that Delhaize has overhauled its board to loosen the Belgian company’s ties to its founding family.
"We assume a 50/50 chance of a deal materialising,” James Grzinic, an analyst at Jefferies in London, said in a note. “This may appear optimistic, given the early nature that potential negotiations could be at. However, we do not see material strategic alternatives for Ahold, while we suspect that Delhaize shareholders would be willing to entertain an exit at a suitable control premium." Grzinic raised Delhaize to buy from hold and Ahold to hold from underperform.
Both retailers operate supermarkets in the East Coast of the US and in Benelux. A merger would create savings of as much as €600 million, according to analysts, helping deflect intensifying competition in the US.
Ahold’s Giant Landover chain, which operates in Virginia, Maryland, Delaware and Washington DC, has been hurt by competitors opening new stores, while the market in New England has been stagnant, said the company, which owns Stop & Shop. Delhaize’s Food Lion faces challenges from Wal-Mart Stores' addition of small-format grocery stores. Harris Teeter, now owned by Kroger, is also cutting prices.
"We believe a merger like this, long since suggested for the past ten years, makes more sense now but is somewhat defensive in nature,” said Tony Shiret, an analyst at BESI Research in London.
Bloomberg News, edited by ESM
