U.S. attorney in Manhattan to lead Ahold investigation

Overstated profit could hit $1 billion, says analyst

March 01, 2003|By Paul Adams and Lorraine Mirabella | Paul Adams and Lorraine Mirabella,SUN STAFF

Worries about the depth of Columbia-based U.S. Foodservice's financial misdeeds continued to buffet investors yesterday as federal prosecutors in Manhattan prepare a broad investigation into the company's accounting methods.

A federal law enforcement spokeswoman in Baltimore said yesterday that the U.S. attorney's office for the Southern District of New York is leading a probe into U.S. Foodservice parent Royal Ahold NV.

The Dutch food giant said Monday that it overstated earnings by at least $500 million in 2001 and 2002 as a result of accounting irregularities at its food service subsidiary. Some analysts said the total could climb higher as new details emerge during the investigation.

"The $500 million figure is just an indicative figure and could perhaps be $1 billion," said Oscar Poos, an analyst with Oyen & Van Eeghen in Amsterdam. Poos said U.S. Foodservice could be vulnerable to sale as Ahold tries to trim nearly $13 billion in debt resulting from dozens of acquisitions in recent years.

Ahold's U.S. shares lost 40 cents yesterday, nearly 10 percent, to close at $3.70. The shares began the week at $10.69.

This week's disclosures resulted in the resignation of Ahold's top two executives and the suspension of two U.S. Foodservice marketing and procurement officials.

Law enforcement sources said the investigation will look into whether U.S. Foodservice executives improperly booked vendor allowances, which are discounts suppliers pay in exchange for volume purchases or other consideration.

Such discounts reduce the cost of goods sold and can account for 5 percent to 10 percent of a food distributor's sales.

U.S. Foodservice reported nearly $18 billion in sales last year, which is why Poos and others speculate that the company's losses from improperly booked vendor allowances could be higher than the initial $500 million estimate.

Analysts said U.S. Foodservice executives were under extreme pressure to help Ahold meet its goal of 15 percent growth in earnings per share annually.

Edouard Aubin, a food retail analyst for Deutsche Bank AG in New York, said he believes Ahold's numerous acquisitions may have overstretched the company financially, and prompted managers at U.S. Foodservice to turn to aggressive accounting methods to meet earnings goals.

"Ahold's management has put a lot of pressure on the management of U.S. Foodservice," Aubin said. Some of this stems from pressure the Dutch government has placed on Dutch corporations to expand overseas, he said.

"The Dutch government has pushed Dutch companies to over-stretch themselves too much financially," by allowing corporations to set up subsidiaries in the Dutch Caribbean, which in turn make internal loans to subsidiaries in other countries where the tax structure is less favorable, he said.

In this way, Ahold has been able to pay a lower tax rate on interest income and outbid rivals when making acquisitions, he said.

In addition to its treatment of vendor allowances, Ahold, the world's third-largest retailer, faces scrutiny of its business practices and methods of accounting for acquisitions. Ahold said this week that it was changing the way it handles accounting for its joint ventures, which span the globe.

One law enforcement source said the investigation in Maryland is still in the early stages of gathering documents and conducting initial interviews. Federal investigators became involved after Ahold provided details of its own internal investigation to the U.S. attorney's office in New York.

Annemiek Louwers, a spokeswoman at Ahold's headquarters in Zaandam, declined to comment on the status of the company's investigation.

Ahold has indefinitely postponed the release of its year-end financial results, which were due this month. The company also is hunting for a new chief executive to replace Cees van der Hoeven, who resigned after Monday's financial disclosures.

Once a darling among Dutch investors, the company faces growing skepticism in the financial community. Ahold's senior unsecured rating was cut to junk status by Fitch Ratings yesterday. The downgrade follows similar moves by Moody's Investor Service and Standard & Poor's, which lowered Ahold's debt rating to below investment grade this week.

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