ZAANDAM, Netherlands -- Ahold here said it has agreed to sell its Bruno's and Bi-Lo chains to Lone Star Funds, a multinational private investment group with offices in Dallas, for $560 million.
The price could increase to $660 million if the two chains, which operate 455 stores in the Southeast, achieve certain targets related to the disposition of inventory and assets. Lone Star also will assume the chains' debt obligations.
The sale would leave Ahold U.S. Retail with a core of four regional chains in the Northeast and the Peapod Internet-based grocery service, plus a convenience-store division in the Northeast that is still on the block. The company also still owns U.S. Foodservice, the Columbia, Md.-based distributor whose accounting improprieties forced Ahold to restate its earnings and initiate the asset disposals.
Ahold last February said it planned to sell Bi-Lo and Bruno's as part of a plan to raise $3.4 billion through asset sales by the end of next year to reduce debt. This sale should leave it less than $300 million shy of that goal, analysts said.
While the sale price came in at the low end of analysts' expectations, analysts seemed pleased that the company would now be able to focus more attention on its remaining U.S. operations.
"Taking into account for the debt portion, proceeds from Bi-Lo and Bruno's of $660 million do not seem disappointing," said Patrick Roquas, analyst, Rabobank, Amsterdam. "With the disposal program nearing its completion, we believe attention will now be fully focused on the underlying performance of the U.S. operations in retail and food service."
Roquas said he expected Ahold's remaining retail chains to "continue their downward trend in 2005," however, as the company continues to invest in pricing and store upgrades.
Jerome Samuel, analyst, Ixis Securities, Paris, said the "unimpressive price tag" on the two chains could be attributed to their relatively weak profitability.
"This is basically good news for Ahold, although the price tag would seem to be at the lower end of the range expected by the market, and the timing is not that great given the [dollar-euro exchange] rate."
Ahold has not provided details on the performance of the two chains, although it has indicated that they have been weak. In reporting its third-quarter results in November, Ahold said operating income at Bi-Lo and Bruno's before impairment charges declined compared with results from the year-ago period. Through the first three quarters of 2004, operating income at Ahold U.S. Retail overall slid by 35%, to $631 million.
Roquas estimated that earnings before interest, taxes, depreciation and amortization (EBITDA) at Bi-Lo and Bruno's was slightly negative in 2004.
The two chains had combined sales of nearly $5 billion in 2003 -- about $3.2 billion at Bi-Lo and about $1.8 billion at Bruno's. Bi-Lo, based in Mauldin, S.C., operates 287 stores in South Carolina, North Carolina, Georgia and Tennessee. Bruno's, based in Birmingham, Ala., operates 168 stores in Alabama, Florida, Georgia and Mississippi.
Ahold paid $500 million for Bruno's just three years ago. At that time it said the chain, which operates under the Food World, Food Max and Food Fair banners in addition to the Bruno's nameplate, had EBITDA of $60 million on sales of $1.65 billion in fiscal 2000.
The acquisition of Bruno's was the last in a series of purchases Ahold made in the U.S. as it built an empire of 1,635 stores stretching from Alabama to New England. Bi-Lo was the company's first acquisition in 1977. Ahold announced a plan to merge the back-office operations of the two chains in January 2003, shortly before it revealed the accounting scandal that would eventually force it to sell the two chains.
Ahold's remaining U.S. retail businesses, with an estimated annual sales of $22 billion, are Stop & Shop, Quincy, Mass.; Giant Food, Landover, Md.; Giant Food, Carlisle, Pa.; Tops Markets, Williamsville, Pa.; Peapod, Chicago; and the Tops Convenience Store division.
Lone Star, which said it manages more than $13 billion in assets and investments in North America, Europe and Asia, said it planned to retain the Bi-Lo and Bruno's banners.
"We are excited about our investment in Bi-Lo and Bruno's and to have the opportunity to participate in their future development," said Len Allen, executive vice president, Lone Star U.S., in a prepared statement. "Together with the experienced and talented management team at B-Lo and Bruno's, we will seek to build on the competitive strength of the business and position it for long-term success. We are looking forward to continuing the strong tradition of brand leadership that Bi-Lo and Bruno's have established over many decades in their markets."
A spokesman for Lone Star said Allen was not available for further comment.
The company's Web site explains that Lone Star Funds are "closed-end, private-equity limited partnerships that include corporate and public pension funds, university endowments, foundations, bank holding companies, family trusts and insurance companies." Among the investment strategies listed on the site are corporate acquisitions, in which the company seeks an "operational turnaround in a longer-term hold strategy."
Lone Star also owns the Shoney's and Captain D's restaurant chains in the Southeast and the Windham Tutwiler Hotel in Birmingham.
Dean Cohagan, president and chief executive officer, Bi-Lo and Bruno's, will remain in that position under Lone Star.
"We are looking forward to working with Lone Star, which has the financial skills and strategic resources that can help us continue our long tradition of providing outstanding service to our customers and supporting the communities in which we live and work," said Cohagan in a prepared statement issued by Ahold. "We will now become a regional supermarket operator -- one that will be fast-moving, flexible and responsive. We will be a company capable of taking decisive actions based on the needs of our businesses, our customers and the competitive dynamics of our local and regional markets. Our goal is to be the best regional supermarket in the Southeast."
In that regard, Bruno's and Bi-Lo face a difficult challenge, observers said.
Matt Casey, a site-selection consultant based in Clark, N.J., said both chains face significant competition from such operators as Wal-Mart Stores, Bentonville, Ark.; Publix Super Markets, Lakeland, Fla.; and Food Lion, Salisbury, N.C.
"The competitive environment down there is much stronger than Ahold faces in the rest of its U.S. properties," he said. "Everywhere you find a Bruno's, you are going to find a Wal-Mart Supercenter. Also, Publix has entered into a lot of Bi-Lo areas, and with Food Lion revamping, and Harris Teeter opening nice stores, the environment down there is cutthroat.
"All the niches are filled," he added. "Wal-Mart has the lowest prices, and Publix is out-servicing everybody in the Southeast."
He noted that both Bi-Lo and Bruno's overall have good locations, predominantly in small towns.
Burt Flickinger III, managing director, Strategic Marketing Group, New York, also noted that the stores are in good locations but said Lone Star would have to make investments in refurbishing them and in adding more store-level workers to make the chains competitive.
"This has the possibility of being one of the biggest grand slams in terms of return on capital for the investors," he said. "But if the investors cut cap-ex or cut store hours, it could be one of the biggest blow-ups in recent food-retailing history."
He suggested that Lone Star needs to invest about $100 million in capital expenditures and $250 million per year to improve store-level staffing, especially on evenings and weekends and in the perimeter service departments.
He also stressed the importance of the chains either retaining their own distribution or outsourcing to well-established wholesalers. Bi-Lo operates two full-service distribution facilities in Mauldin and Chattanooga, Tenn., while Bruno's has one warehouse in Birmingham.
As far as Ahold's remaining businesses, Flickinger said the company stands to be better positioned without Bruno's and Bi-Lo weighing it down.
"The markets were not contiguous to Ahold," he said. "Ahold's power alley of strength has always been in triangle of operations between Baltimore, Buffalo and Boston, and by focusing on that triangle, and making an effort to sell those convenience stores, Ahold has an opportunity to profitably build sales, particularly as they go against operators like [Montvale, N.J.-based] A&P that continue to struggle."
