Ahold share price up, confirms merger with Delhaize to challenge Walmart

Dutch grocery chain Koninklijke Ahold NV has agreed to merge with Belgian peer Delhaize Group SA, the two confirmed on Wednesday, creating a global top 20 retailer and one of the largest in the US to challenge the dominance of Walmart.

A combination between the two grocery chains would create the fourth-largest retailer on home turf and fifth-biggest in the US, with a value of €26 billion based on Tuesdays close. Despite being headquartered in Europe, the two generate about 60% of their sales in the US, mainly along the East Coast. Ahold operates the Giant and Stop & Shop chains, as well as the Peapod online grocery store, while its Belgian counterpart owns Food Lion and Hannaford.

Under the terms of the deal, Delhaize shareholders will receive 4.75 Ahold ordinary shares per Delhaize share, and will own 39% of the combined companys equity, while Ahold investors will control the remaining 61%. The deal is expected to be completed by mid-2016.

Aholds CEO Dick Boer will assume the corresponding position at the new firm, Ahold Delhaize, while Delhaize Chief Executive Frans Muller will be his deputy and will oversee the integration of the business. The combined board will be led by Mats Jansson, current chairman of Delhaize, while previous reports have stated that Aholds finance chief Jeff Carr will retain his position at the new company.

The merged firm will generate about €54 billion in annual sales, with more than 6 500 stores and a global workforce of 375 000 employees serving over 50 million customers per week on both sides of the Atlantic. The combination is expected to generate annual cost savings of €500 million to be realized in the third year after its completion, the companies said, although analysts had previously voiced skepticism over the potential synergies.

“We are very convinced that €500m is do-able, but it will be hard work,” Mr. Boer said.

The savings will come from increased pricing power in the US, while some job cuts due to overlapping activities are also likely, although both companies refused to say how many. Ahold will also terminate its continuing share buyback program but will return €1 billion to shareholders through a capital return and a reverse stock split before the deal is finalized.

The merger comes at a time of continued hurdles for the retail industry in both Europe and the US as discounters that gained popularity during the recession on the back of traditional retailers retain their market share, while many customers have also turned to online stores. Ahold and Delhaize, positioned in the middle, have been mulling for years over a merger that would give them greater pricing power, with analysts projecting that combining forces would allow them to fend off the discounter threat on both sides of the Atlantic.

Delhaize Group SA rose 8.4% on Tuesday in Brussels but slid 3.85% to €84.64 per share by 09:29 GMT today.

Koninklijke Ahold NV traded 1.2% higher at €19.19 per share in Amsterdam, marking a year-over-year increase of 40.34%. According to the Financial Times, the 23 analysts offering 12-month price targets for Koninklijke Ahold NV have a median target of €19.30, with a high estimate of €23.00 and a low estimate of €13.50. The median estimate represents a 1.82% increase from the previous close of €18.96.