Ahold Seen Returning ICA Sale Cash Over Acquisitions

Royal Ahold NV, the Dutch owner of Stop & Shop grocery stores, is likely to redistribute some of the 20 billion kronor ($3.1 billion) proceeds of its ICA stake sale to shareholders as it shies away from large acquisitions.

The retailer, which said yesterday it agreed to sell its 60 percent stake in Sweden’s largest food retailer to ICA’s other shareholder Hakon Invest AB, will probably use the cash to pay a dividend, according to Erwin Dut, an analyst at Kempen & Co. NV.

“Ahold is not interested at all in doing a large acquisition,” Dut said in a phone interview from Amsterdam. “Ahold is happy to buy shops both in the U.S. and in Benelux, though those stores can easily be bought out of free cash flow. They can return a dividend tax free, so it’s quite an easy way to return cash. A buyback will take more time.”

Ahold may be deterred from making a major purchase after an accounting fraud 10 years ago brought it to the brink of collapse. The Amsterdam-based company has spent much of the last decade selling off the remnants of an acquisition spree and under Chief Executive Officer Dick Boer has focused on expanding into neighboring markets and online.

Ahold jumped as much as 6 percent in Amsterdam trading yesterday, the steepest gain since November 2009, as the sale price was well received by investors. The amount was “very positive” and will result in a tax-free capital gain of about

1.5 billion euros ($2 billion), said James Anstead, an analyst at Barclays Plc in London, revising a forecast he made earlier.

Cash Available

The retailer isn’t disclosing the value of the capital gain, spokesman Jochem van de Laarschot said. It will say more on what it will do with the sale funds closer to the completion date, Chief Financial Officer Jeff Carr said. Hakon estimates that the transaction will be completed in April.

The deal marks the conclusion of a five-month review by Ahold of its stake in ICA, which it has owned jointly with Hakon since 2000. While owning 60 percent of ICA’s shares, the Dutch retailer only controlled 50 percent of the voting rights. It said in September that it was exploring alternatives for the stake, including an initial public offering. Hakon, which is controlled by ICA franchisers, had the right of first refusal.

The amount of cash available for redistribution to Ahold investors will be 1 billion to 1.5 billion euros, said Marco Gulpers, an analyst at ING Groep NV.

“I would see the majority of this used through a share buyback,” Gulpers said. Paying down debt is “not a priority” and he doesn’t see Ahold “engaging in large M&A transactions.” The analyst said he expects Ahold to receive about 1.7 billion euros of tax-free cash once the deal is closed.

Cash Flow

Gulpers’ views were echoed by Fernand de Boer, an analyst at Petercam SA, who said a buyback is more likely than a “super dividend” as the retailer has a “clear” dividend policy that aims for “sustainable growth” in the payout.

Ahold already has a large amount of cash available for expansion compared with competitors. Free cash flow was 932 million euros in 2011, more than 344 million euros for Delhaize Group SA, the Belgian owner of U.S. Food Lion supermarkets.

Yesterday’s disposal represents one of the last steps in reversing Ahold’s acquisition strategy of decades past. The retailer, which was on the verge of a bankruptcy in 2003 amid an accounting scandal that forced it to divest several assets, sold the U.S. Foodservice unit to buyout firms in July 2007 for $7.1 billion. It later sold Tops food stores for $310 million and its Polish stores for 375 million euros.

Online Sales

“ICA is a hangover from the times when they overreached in the 1990s,” said Daniel Lucht, an analyst at ResearchFarm, a London-based retail and consumer-goods forecaster, by phone. “They couldn’t get control of ICA because of the structure of the deal, so that’s why they sold it.”

Investing in its stores and online business will make most sense for the Dutch retailer, Lucht said. “The big thing going forward for Ahold is the online business and that’s what they will invest cash in,” he said. “They know the multichannel shopper is worth more for them.”

CEO Boer has expanded Ahold by buying Web retailer Bol.com, adding C1000 and Jumbo stores in the Netherlands and acquiring Genuardi shops in the U.S. The executive said in November 2011 that he will open a minimum of 50 supermarkets in Belgium in the next five years, while the company aims to triple online sales to 1.5 billion euros.

Ahold rose 3.8 percent to 11 euros as of the close of trading in Amsterdam. The company is trading at about 12 times its estimated earnings, according to data compiled by Bloomberg.

“If you take out ICA, Ahold trades at 4 times Ebitda, which is the typical multiple for a U.S. food retailer,” Dut said. “If the shares remain at this level, there’s a valuation case to be made for a private-equity or a strategic bidder.”

The company, which makes about 60 percent of its sales in the U.S., had earnings before interest, taxes, depreciation and amortization of 2.1 billion euros in 2011.

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