Such a move would have been unthinkable at Ahold, insists Meurs. "A shareholder never has to worry about being diluted in an Ahold acquisition," he sniffs. And given Ahold's parsimonious approach to acquisitions, it's no surprise that analysts believe him. "Ahold's acquisition record is second to none in the industry," says David Shriver, an analyst at Credit Suisse First Boston in London.
In this respect, "we need to be very precise in our assumptions for years one, two, and three," says Meurs. And, he adds, "We err on the side of caution." Further out, the company is even more cautious. But, he notes, "it's not a black-and-white process."
In fact, the company doesn't have merger-and-acquisition teams scouring the landscape for targets. As Meurs puts it, "We don't want to buy companies that are for sale. We want to buy what we want to buy." To that end, the board committee responsible for acquisitions, on which Meurs and van der Hoeven sit, maintains what Meurs calls a list of companies that it considers "best of breed" based on six criteria. He notes that while the list is subject to change, several companies Ahold has acquired, including Giant Food and Stop & Shop, were on it for years before the deals were done.
Ahold's approach to making acquisitions has earned it much praise among investors, but recently the company's rising debt level has come into question. Meurs downplays the significance of the downgrades. "Alan Greenspan has a much bigger effect on our cost of capital than the ratings agencies do," he asserts.
Granted, the spreads on a seven-year note Ahold issued in May 2000, which tend to be wider than those on comparable debt issues by its peers, recently narrowed, from 240 basis points over similar Treasury debt to about 180 basis points. However, Ahold can expect higher interest payments on any new debt it takes on.
To help address this issue, Meurs has been beefing up its investor- relations efforts with fixed-income investors, particularly in Japan, where the extremely low interest-rate environment offers Ahold opportunities to reduce its cost of capital. Two years ago, for instance, no bond analysts attended Ahold's annual investor conference in New York. Thanks to its courting of that group since then, Ahold managed to attract a handful to its most recent meeting in March.
"We're making an extra effort" in the bond markets, says Meurs, "because we're absolutely convinced that full, reliable information will help" sell Ahold's bonds at the lowest possible cost.
RISK AND REWARD
To be sure, exposure to the yen would introduce Ahold to currency risk, which, analysts say, the company has done a very good job avoiding thus far. But Meurs responds that Ahold would hedge any exposure to the yen.
Meanwhile, Meurs says he wants to improve Ahold's interest coverage ratio of EBIT to net interest. Now at around 3.15 times, he would like to see it closer to the 3.9 level at which it stood at the end of 1999. Meurs says he plans to do that by returning to Ahold's traditional mix of 50 percent debt and 50 percent equity to finance new acquisitions, a practice it departed from in the PYA/Monarch deal.
The challenges facing Ahold help explain recent speculation that the company needs to either make a blockbuster acquisition or sell itself to an even bigger player. Meurs dismisses any immediate need for the former, and says the latter is unlikely, simply because only Wal-Mart is in a strong enough financial position to afford Ahold. What's more, Wal-Mart and Ahold are a poor fit in terms of business model, and antitrust regulators would be sure to bristle at the mention of such a move. Given Meurs's observation about the need for a financially muscular suitor, however, investors can be assured of one thing: they can safely count on him to demand a sizable premium should a serious suitor appear on Ahold's doorstep.
Ronald Fink a deputy editor at CFO.
THE ASIAN REMODEL
Royal Ahold clearly has not played its best hand in Asia. Granted, the region represents only 1 percent of its annual revenue. Yet its efforts in the region are significant, because they demonstrate Ahold's difficulty in moving beyond its traditional model of buying large, established supermarket chains.
It had 40 stores in China, amounting to a mere 1 percent of the nation's supermarket business. "It would have taken us more than five years to reach break-even, which was too long from our perspective," says Eppo Boot, the Bangkok-based CFO of CRC Tops (a wholly owned subsidiary of Ahold). In Singapore, Ahold's 13 stores neared break- even, but it discovered that the market was too small to allow for profitable expansion. At the moment, new acquisitions in Asia are on hold, and the company recently jettisoned its joint ventures with supermarket chains in China and Singapore. Last year, the company also discontinued the post of regional CFO, which was based in Singapore.
A major reason for Ahold's disappointment is the nature of the competition in the Asian retail foods market. On the one hand, there are Asia's highly popular "wet markets"--local street stalls that Boot refers to as "unorganized competition." On the other hand, there are hypermarkets developed by Ahold's competitors, Carrefour and Casino, both based in France, and Tesco of the United Kingdom. These megastores have been a hit with consumers, offering them a one-stop shopping experience that lets them buy everything from televisions to bananas, all within one air-conditioned store, while providing Tesco and the like with greater economies of scale than Ahold's food-store chains.
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