Ahold touted as rumored Tesco target

This is not the first time that talk of Tesco sizing up Ahold has circulated around the trading floors. The UK retailer first cast its eye over the Dutch grocery giant in 2003, after an accounting scandal at its US foodservice arm left it with a E1 billion hole in its accounts which needed to be plugged. Despite an emergency loan package, critics were adamant that the beleaguered retailer would be unable to cope with its debts, leaving it exposed to a complete takeover.

But Ahold has managed to prove its critics wrong. It announced a three-year turnaround plan designed to optimise its store portfolio, strengthen its financial position and improve corporate governance and accountability. Divestments featured prominently in the plan which aimed to realise E650 million in cost savings by 2006. Indications are that the plan is working, but at the expense of profitability. Its decision to pay shareholders E945 million in compensation relating to a US lawsuit resulted in a Q3 net income loss of E239 million at the end of October 2005.

If Tesco were mulling a potential bid, Ahold's European operations appear the most tempting part of the business. It would gain market leadership in the Netherlands through the Albert Heijn fascia, which is fighting off stiff competition from discounters with a stronger price focus, improved value and private label ranges. Its Eastern European assets could prove the most attractive. Both retailers have operations in Poland, the Czech Republic and Slovakia, a key region of growth for Tesco.

In Poland, the most developed of the three markets, Ahold divested its hypermarkets to rival Carrefour in 2005 to concentrate on supermarkets and c-stores. Tesco has more than 50 hypermarkets in Poland at present and this would complement its strategy of opening smaller c-stores to broaden its geographic reach in the country. Ahold has around 300 stores in the Czech Republic and such an acquisition would be a major fillip to Tesco, which currently has around 40 stores.

As far as the States is concerned, competition in the grocery arena has been heightened by the sale of Albertsons to Supervalu in January. And Ahold's US fascias Stop & Shop and Giant Landover are struggling to make headway, with decreasing like-for-likes across both formats.

Ahold's US Foodservice operation would be the acquisition of choice for KKR. There is immense potential for the operation, which has 67 distribution centres across 36 states with significant cost savings to be made as Ahold has proved by announcing the axing of 700 jobs in an attempt to save $100 million.

However, even if Tesco does wish to enter the States, Verdict believes that Ahold's US assets are not the most effective way of doing so.

Tesco is never a retailer to balk at an opportunity to strengthen its competitive position. Its considerable success in the international arena to date is thanks to its prudent approach to expansion through the strategic acquisition of smaller players, alongside organic growth. It knows far better than to attempt to bite off more than it can chew.