Ahold to Divide U.S. Foodservice

According to analysts, cited in the news reports, the split, which is expected to save the company $100 million, is a forerunner to a spin off.

Lawrence Benjamin, U.S. Foodservice president, said today the decision to divide the second largest distributorship is designed to improve profitability.

Analysts were quoted as saying that dividing U.S. Foodservice into Broadline, which rings up more than 85% of the division's sales, and Multi Unit made the sale of the operation more likely.

"Having resolved the litigation yesterday, and now announcing the restructure, plenty of private equity houses will be running the slide rule over the businesses," analyst Tim Attenborough of Exame Securities said in a Reuters story. "We think it's worth 5 billion euros ($5.9 billion), people say that's conservative but we think it's fair," he said.

Analysts said U.S. Foodservice performed better than expected in the quarter as did Ahold's American retail arm Stop & Shop, despite tough pricing from competitors and disappointing sales growth, and the results were broadly welcomed by the market.

"Ahold's results came in better than could have been expected after the sales announcement, with the difference ... largely seeming to stem from lower costs at Stop & Shop/Giant Landover and margin improvement at U.S. Foodservice," analysts at WestLB said in a research note.

Ahold's third quarter sales of 10.2 billion euros ($12 billion), reported last month, came as a disappointment to investors.

The Dutch company, which generates 70% of its sales in the United States, maintained its 2006 forecast for its retail business targeting an operating margin of 5%, annual sales growth of 5% and a return on net assets of 14% for the year.

Ahold also repeated its goal of attaining an operating margin of at least 1.7% for the entire foodservice business in 2006. The multinational corporation said it planned to reduce total U.S. Foodservice administrative costs by $100 million, with more than half of the savings to be realized in 2006 and the balance in 2007 and 2008.

Despite the widespread assumption that Foodservice is now on the block, Benjamin insisted that it was primarily a move to improve profitability.

"The businesses are quite different, we think it will give a lot more focus" to increase performance, Benjamin said. No area of the business will be left "untouched" in the cost cutting, he said.

Benjamin said the Broadline business would have an operating margin of at least 3% by 2008, while Ahold is projecting an operating margin in excess of 1.7% next year.

Ahold Chief Executive Anders Moberg said the company remains committed to U.S. Foodservice business.

Ahold also reported that its net loss grew to 239 million euros ($280.8 million) in the third quarter ended Oct. 9, from 134 million euros ($157.5 million) a year earlier as it paid to settle a class-action lawsuit. Yesterday, the company agreed to pay $1.1 billion to settle a U.S. class-action lawsuit relating to fraudulent accounting. The settlement ends all civil litigation against Ahold relating to the earnings overstatement, which was first disclosed in 2003 and led to the resignation of the company's top two executives. Class-Action Settlement

The shares rose 27 cents, or 4.5%, to 6.30 euros ($7.40) in Amsterdam. Before today, they had added 6.1% in the past year, the second-biggest increase in the Bloomberg Europe Food Retailers Index, which is almost unchanged.

Ahold said in 2003 that it overstated profit by 970 million euros, ($1.14 billion today). Most of the earnings inflation took place at U.S. Foodservice, which distributes food to customers including military bases, sports stadiums, restaurants and caterers.


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