Ahold to split food division

Ailing Dutch firm seeks to boost profit at U.S. Foodservice

November 30, 2005|By PAUL ADAMS AND JAMIE SMITH HOPKINS | PAUL ADAMS AND JAMIE SMITH HOPKINS,SUN REPORTERS

As the latest step in a recovery effort precipitated by a $1 billion-plus accounting scandal nearly three years ago, Royal Ahold NV said yesterday that it will boost profit at its U.S. Foodservice unit in Columbia by splitting it into two parts and cutting administrative costs.

One unit of the food distribution company will deliver bulk food and equipment to institutional buyers such as hospitals, schools and prisons, while the other will service fast-food chains.

Ahold, which saw its shares climb 5.6 percent to close at $7.51 yesterday, also plans to cut administrative costs by $100 million by 2008, although it did not provide details.

Rebuilding U.S. Foodservice, which was at the center of the scandal disclosed in February 2003, has been central to its Dutch parent's attempts to clean house and regain credibility. Several former U.S. Foodservice executives and outside vendors continue to face legal charges in the scandal.

Yesterday's announcement comes a day after Ahold, which also owns the Giant and Stop & Shop supermarket chains, reported that it had agreed to pay $1.1 billion to settle a securities fraud class action suit.

Analysts said the move was key to removing a financial cloud that has been hanging over the company for two years.

The restructuring at U.S. Foodservice, which had 2004 sales of $18.8 billion and is the nation's second-largest food distributor, seems to signal that Ahold plans to hang on to the busi- ness, rather than sell it to raise cash, analysts said.

"The biggest surprise is they're sort of avoiding all talks of U.S. Foodservice being sold," said Jeffrey M. Metzger, publisher of Food World, a trade publication based in Columbia. "It is a productive citizen again and it helps improve cash flow immensely."

Ahold may fear that U.S. Foodservice would be undervalued if put on the market today, Metzger said, although he still believes it is likely the business will be sold to raise cash.

U.S. Foodservice remains a vital business with enormous cash-generating potential. Food distribution to restaurants - one of U.S. Foodservice's business lines - has been a steadily growing sector for years.

Americans spent nearly half their food budget at restaurants in 2003, according to the most recent U.S. Department of Agriculture numbers. That added up to $445 billion, compared with $390 billion five years earlier, adjusted for inflation.

"As away-from-home consumption continues to grow, you would expect food service companies to obviously continue to grow," said R. Wes Harrison, an associate professor of food marketing at Louisiana State University. "As we get busier and time becomes more valuable to us ... we tend to eat out more."

But that growth has been slowing more recently, putting pressure on distributors to be more efficient, said Willard R. Bishop Jr., president of Willard Bishop Consulting, a food marketing consulting firm near Chicago.

The industry is seeing both consolidation and fragmentation as companies try to grab market share with economies of scale at one end and specialized services at the other, he said.

"It makes for a very fast-moving and dynamic marketplace," Bishop said.

The U.S. Foodservice unit that provides cafeteria food to hospitals, schools and government customers accounts for 85 percent, or about $12.4 billion, of the company's annual sales. Company executives said they hope to increase net sales in the unit by at least 5 percent annually through 2008 and increase penetration of its private brands business to 33 percent from 26 percent.

As part of plans outlined yesterday, the company hopes the unit that services chain restaurants will achieve profitability by 2007.

"U.S. Foodservice's financial performance is recovering, and the plan we are presenting today details the strong opportunities for pursuing profitable growth and creating a more valuable and transparent business for Ahold shareholders," said Anders C. Moberg, Ahold's chief executive.

Ahold disclosed in 2003 that U.S. Foodservice had inflated earnings by $800 million. An internal investigation revealed accounting abuses exceeding $1 billion and led to the ouster of Ahold's top executives in the Netherlands.

The company said executives at U.S. Foodservice had inflated the value of volume discounts paid by suppliers over the course of several years. Mark P. Kaiser, a former U.S. Foodservice marketing executive, and Michael J. Resnick, one-time chief financial officer, face trial on a variety of charges, including securities fraud. Both have pleaded not guilty.

Seven of the company's former vendors pleaded guilty to conspiracy charges this month for their part in the scandal. They are among more than a dozen executives and suppliers who have faced criminal charges in the case.

Ahold also reported yesterday that its third-quarter loss increased to 239 million euros ($281 million), up from 134 million euros ($158 million) for the comparable quarter last year. The losses stem in part from costs to settle the U.S. class action suit and other expenses related to the scandal.

Credit rating service Standard & Poor's said it would leave its rating for Ahold unchanged at BB+, in part because of concern over the unexpectedly large payout in the class action suit, it said. The rating is below investment grade.

paul.adams@baltsun.com jamie.smith.hopkins@baltsun.com

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