Royal Ahold reduces its earnings forecast for this year by half

Giant parent is buying out its Argentine partner

July 18, 2002|By BLOOMBERG NEWS

AMSTERDAM, Netherlands - Royal Ahold NV, the world's biggest food distributor and parent of Maryland-based Giant Food Inc., cut its 2002 earnings forecast by half after being forced to buy out a joint venture in Latin America because its Argentine partner defaulted on debt.

Earnings per share should rise 5 percent to 8 percent, excluding write-downs, goodwill and currency shifts, instead of 15 percent as previously forecast. This is the first cut in profit forecast in Ahold's history, Chief Executive Officer Cees van der Hoeven said on a conference call with reporters.

The purchase ends Ahold's ties to Grupo Velox two weeks after the Argentine partner was forced to close a banking unit that ran out of cash. The costs are in line with estimates made by Van der Hoeven this month when he said a write-down was likely for the jointly owned Disco supermarket chain in Latin America, where Ahold earns about 4 percent of sales.

"They're addressing their problems," said James Buckley, who manages the 10 million euro ($10.1 million) Solus European Growth Fund, which includes Ahold shares. "The situation is not as negative as the market has made out."

Ahold shares have lost more than 20 percent of their value since July 1, when Grupo Velox's Banco Velox unit became the seventh bank to be shut down by the Argentine central bank since the government devalued the currency and defaulted on $95 billion of debt.

The stock rose 1.09 euros, or 6.9 percent, to 16.79 euros today, paring this year's decline to 49 percent.

The stock "is just too cheap," said Andrew Fowler, an analyst at Merrill Lynch who upgraded his rating on the stock to "buy" from "neutral" yesterday. "Some form of profit warning was long ago expected by most analysts."

Ahold joined with Velox in 1998 to control the Disco SA and Santa Isabel SA grocery chains in Argentina, Chile and Peru. The Dutch company has expanded its stake to 85 percent of the joint venture.

After the partner defaulted on debt backed by shares in Disco, Ahold was obliged to assume the loans and buy Velox's shares in the venture for $490 million.

Now, Ahold is paying more to buy out its partner and assume debt than it cost to buy half of the joint venture four years ago. The company paid $368 million for 50 percent of the venture in January 1998, saying at the time that earnings would be boosted by the push into Latin America.

Profit also is being eroded by increased interest payments, less-than-expected earnings in Spain and lower gains from property sales than targeted, Ahold said. Second-quarter earnings per share won't increase after booking a write-down of between 350 million euros and 450 million euros for Disco.

Earnings will be 136 million euros to 164 million euros lower than expected this year before including the write-down, goodwill and currency shifts, the company said. A further decline in stock markets might also increase pension costs this year, Ahold said.

The company also cut its forecast for 2002 sales at the Columbia-based U.S. Foodservice unit to between $18 billion and $18.5 billion from a previous target of as much as $19 billion.

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