Dutch buy No. 2 U.S. food firm

Royal Ahold to pay $3.6 billion for U.S. Foodservice

Buyer owns Giant chain

Company offers $26 a share for stock worth $18 Monday

Food distributors

March 08, 2000|By Bill Atkinson | Bill Atkinson,SUN STAFF

Dutch supermarket giant Royal Ahold N.V. agreed yesterday to buy U.S. Foodservice of Columbia for $3.6 billion in cash and debt.

Royal Ahold in a cash tender offer will pay $26 a share for the second-largest food distributor in the United States and will start buying the stock Monday. Royal Ahold, which bought Giant Food Inc. of Landover in 1998, is expected to complete the purchase next month.

The $3.6 billion price tag also includes Ahold picking up about $925 million in debt.

Analysts praised the deal, saying U.S. Foodservice shareholders benefit handsomely after suffering for months with a listless stock.

"It is fabulous," said William F. Maguire, an analyst at Wasserstein Perella Securities Inc., a brokerage in New York. "There is no one else in the world who would pay $26 for a stock that was priced at $18 [Monday] and $11.50 three weeks ago. Ahold has bought a good company."

Shares of U.S. Foodservice, which are traded on the New York Stock Exchange, increased 33.56 percent -- or $6.125 -- on the news, to close at $24.375. American depositary receipts of Royal Ahold, also traded on the Big Board, closed at $22.9375, up 6.25 cents.

Jim Miller, chairman and chief executive officer of U.S. Foodservice, said the transaction is a "tremendous platform for innovation between the institutional food services business and the retail grocery business."

He expects "no layoffs in operating branches" and "very minimal impact in its corporate office."

"U.S. Foodservice expects to add jobs in the long run based on expected future growth and Royal Ahold's past acquisition experience," he said.

Miller said the companies will realize at least $75 million in cost-savings by next year. He will continue as president and CEO of U.S. Foodservice and report to Bob Tobin, president and CEO of Ahold USA. U.S. Foodservice's headquarters will remain in Columbia and its name will not change, the companies said.

"All in all, if there has to be a merger, this is the best merger we could possibly come up with," said Richard C. Mike Lewin, state economic development secretary. "We have got an absentee owner who appreciates the value of very fast-growing companies and lets them do their own thing. This cannot be anything but good for the Maryland economy."

The deal surprised some industry analysts because the companies are vastly different, even though both are in the food business.

U.S. Foodservice specializes in selling food and kitchen equipment to restaurants, hotels, hospitals, cafeterias and other institutions across the country. The company has 40 distribution centers and 13,250 employees, of which about 800 are in Maryland. U.S. Foodservice made $83 million on $6.2 billion in sales in its most recent fiscal year, which ended July 3.

Royal Ahold is nearly six times the size of U.S. Foodservice, with sales last year reaching $35 billion. The company runs 4,000 supermarkets in the United States, Europe, Latin America and Asia.

Royal Ahold is a powerhouse on the East Coast, operating five large supermarket chains, including Giant, which it bought for $2.7 billion.

The Dutch company will tap into food service, a business that is growing much faster than the grocery industry, since more people are eating out.

It also stands to benefit from U.S. Foodservice's fledgling e-commerce business, nextdaygourmet.com, which allows customers to order kitchen equipment, restaurant supplies and food specialty items over the Internet.

U.S. Foodservice also will be able to reach into Royal Ahold's deep pockets and make more acquisitions.

The company, created in 1989 as J P Foodservice through a leveraged buyout of a Sara Lee subsidiary, has grown rapidly over recent years, mainly by acquiring smaller food distribution companies. The company went public in 1994.

It has also been a strong performer, but lately its stock price has been battered because many investors are pumping money into hot technology stocks.

In addition, while most of U.S. Foodservice acquisitions have paid off, last month the company said it would close its money-losing San Francisco distribution operation, which it inherited as part of its 1997 purchase of Rykoff-Sexton Inc.

The news sent the stock to a low of $11.50 a share Feb. 16, down 56 percent from its Jan. 29 high of $26.25.

Joseph Milano, an equity analyst at T. Rowe Price Associates Inc., the Baltimore mutual fund company, said U.S. Foodservice was "pushed into" a sale.

"The fact is the stock market has not given them credit for the good numbers that they have reported over the last 15 months," he said.

Management thought "shareholders might have to sit and wait another year or two years before they could see the price that they got from Ahold today," Milano said.

Price owns about 11 million shares of U.S. Foodservice, and Milano likes the deal.

US Foodservice

Headquarters: Columbia

Employees: 13,250 (800 in Maryland)

Chief executive: Jim Miller

Facilities: Forty distribution centers in the Northeast, East Coast, West Coast, Texas and Oklahoma

Fiscal 1999 sales: $6.2 billion

Shares outstanding: 101.5 million

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