Scramble at Ahold is likely to spare U.S. subsidiaries

Some units in Europe and South America may face auction block

A $500 Million Mistake

February 26, 2003|By Paul Adams | Paul Adams,SUN STAFF

The fallout from a $500 million earnings overstatement at Columbia-based U.S. Foodservice will likely hit hardest in Europe and South America as parent company Royal Ahold NV moves to sell underperforming assets to pay off its debts, analysts said yesterday.

That means U.S. Foodservice and Giant Food Inc. - two of the Dutch food giant's key cash generators in the United States - will probably be spared from the auction block in the near term. But industry experts said the Columbia institutional food supplier could face an uncertain future if the depth of the company's accounting irregularities turn out to be deeper than the $500 million estimate disclosed Monday by Ahold officials.

"Only in the worst case would they really actually think about selling any U.S. units, and then I think it would be [U.S. Foodservice]," said Lukas Daalder, an analyst with Oyens & Van Eeghen in Amsterdam.

In addition to owning Giant, Ahold owns the Stop & Shop, Bi-Lo and Tops chains, making it the biggest grocery retailer on the East Coast.

One of the largest food distributors in the nation, U.S. Foodservice primarily serves hospitals, schools, hotels and restaurants.

Independent forensic accountants are scouring the books at U.S. Foodservice to figure out just how much the company overstated earnings in 2001 and 2002. The company said it improperly accounted for discounts provided by suppliers in exchange for selling their products.

Chief Executive Officer Cees van der Hoeven and Chief Financial Officer Michiel Meurs resigned after Ahold disclosed what it termed accounting "irregularities." A small number of executives in U.S. Foodservice's sales, marketing and procurement division have been suspended during the investigation.

Ahold executives declined to identify individuals, but sources close to the company said Mark Kaiser, a well-regarded marketing executive, and Tim Lee - also a senior executive in the marketing and procurement department - are on the list.

Analysts expressed surprise that James Miller, U.S. Foodservice's chief executive, and Michael Resnick, the unit's chief financial officer, have not been replaced.

In a letter he distributed to the company's 28,000 employees, Miller said Henny de Ruiter, chairman of Ahold's supervisory board and interim CEO, has expressed support for him and the company as a whole.

"Today's announcement is distressing for all of us, but I want to take this opportunity to assure you that today's news does not change our belief in the viability of our business," Miller said in the memo.

Different situations

A spokeswoman for Ahold said Miller's situation differs from those of van der Hoeven and Meurs.

"Those that have resigned concluded that given the weight of the disclosures announced [Monday] that all of this was their responsibility, and after careful consideration they decided to resign," said Sharon Christians, Ahold's senior vice president for communications.

"With regard to Mr. Miller, the investigation continues and there's no evidence that he should resign."

In his letter to employees, Miller said the financial disclosures won't affect current or past customer invoices, or the date on which they will be paid. The company is in the process of contacting all of its customers and vendors concerning the matter.

Analysts say intense competition and slim margins have prompted many retailers to get aggressive in how they book volume discounts provided by suppliers.

Such rebates can account for as much as 15 percent of revenue for large retailers.

Accounting for them on the balance sheet has long been a gray area, forcing a handful of retailers to restate earnings just in the past year.

The Financial Accounting Standards Board is exploring new guidelines for handling such "promotional allowances."

What likely happened is that U.S. Foodservice booked the discounts as receivables prior to collecting the cash, resulting in earnings being overstated for the past two years, analysts said. Such irregularities are increasingly common, but industry experts say the size of U.S. Foodservice's overstatement is alarming.

"This to me seems significant enough that somebody should have been paying attention to it," said Jeff Tryka, an analyst with Delafield Hambrecht Inc. "Auditors caught it, but my question is: Why didn't they catch it last year?'"

Ahold is facing a string of shareholder lawsuits filed in Europe and the United States. Cohen, Milstein, Hausfeld & Toll, a Washington law firm that specializes in investor class action lawsuits, filed a suit against Ahold yesterday in U.S. District Court in Alexandria, Va. Ahold also faces an investigation by the Amsterdam stock exchange.

What's less clear is whether Ahold may be prosecuted under the Sarbanes-Oxley anti-fraud bill. Ahold is one of about 275 European companies that must comply with the law because its shares trade on a public exchange in the United States. The law requires CEOs and CFOs to vouch for the accuracy of financial statements.

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