A leading retail analyst has said that a tie-up between retail giants Ahold Delhaize and Kroger would create a 'formidable' grocery operator in the US market, which would benefit from 'significant joint-buying benefits'.
Bruno Monteyne of Bernstein Research made the assessment after a recent selloff of shares at Kroger, coupled with positive share price movement at both retail businesses towards the end of last week, despite what Monteyne described as 'badly received' quarterly results at Ahold Delhaize.
Rumour Mill
Ahold Delhaize has been linked with a tie-up with Kroger since October 2017, when an anonymous tweet about a potential merger sent the share prices of both up.
At the time, analysts noted that Ahold Delhaize was still engaged in the integration of the former Ahold and Delhaize operations, saying that while there was a strong strategic rationale for such a tie-up, the timing was 'off''.
But as Ahold Delhaize chief executive Frans Muller said last week, the integration of the two businesses is now "fully completed", with net synergies of €512 million on an annual run-rate basis. This would be a good standpoint from which to launch a merger process, Bernstein suggests.
Commenting on a potential tie-up, Montyene said that due to limited geographical overlap between the two businesses, 'synergies would be (a) limited to buying and back office synergies only but (b) lower risk as it would involve no banner changes'.
He anticipates around $1.3 billion worth of post-tax gross synergies arising out of a proposed deal, which, 'applied to this year's combined net profit for the two companies [...] would provide 36% valuation uplift without a re-rating'.
Further synergies would be possible with regard to e-commerce, Montyene said, with the two retailers having 'complementary solutions' – Ahold Delhaize operates the capital-light, well-integrated Peapod platform, while Kroger is in the process of developing a capital-intensive Ocado-powered platform.
This would give 'the combined business access to a very broad set of e-commerce technologies to roll out in different territories', Monteyne said.
Merger Of Equals
In terms of which company would be in a position to bid for the other, Montyene said that he believes any coming together would be a 'merger of equals', with Ahold Delhaize's ' lower leverage and higher market cap' meaning it would likely be a more 'obvious candidate' to bid for its US peer.
In addition, Monteyne doesn't believe that such a deal would lead to the disposal of the group's European business adding that 'for the foreseeable future the cash generation of Europe and strong competitive position in the Netherlands makes the combined group more resilient for the grocery e-commerce transition'.
Ahold Delhaize reported net sales of €16.3 billion in the second quarter of its financial year, as well as underlying EBITDA of €1.27 billion. Its US operation accounts for just over two-thirds of the group's total sales.
© 2019 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: European Supermarket Magazine.
