Harris Teeter Supermarkets Inc. (HTSI:US), the Matthews, North Carolina-based grocery chain exploring a sale, has attracted interest from Royal Ahold NV (AH), the Dutch owner of Stop & Shop stores, said people with knowledge of the matter.
Ahold has contacted JPMorgan Chase & Co., retained by Harris Teeter to evaluate options, and is seeking more information on the sale process, said one of the people, who asked not to be named because the negotiations are private. Ahold hasn’t made a formal bid, according to that person.
“We regard Harris Teeter as a likely deal for Ahold,” Patrick Roquas, an analyst at Rabobank, wrote in a report today. A transaction wouldn’t hurt Ahold’s stock as it’s unlikely that the Amsterdam-based company is willing to put its “credible track record at risk” by paying too much.
Harris Teeter’s market value tops $2 billion. Buying the chain would help Ahold expand further in the southern U.S. and Washington, D.C., and its acquisition history and previous expansions position the Dutch chain as a probable bidder, said BMO Capital Markets analyst Karen Short.
Ahold “appears to have more than adequate capacity on its balance sheet to complete a transaction,” she said in a Feb. 20 research note. She also listed Lakeland, Florida-based Publix Super Markets Inc. (PUSH:US) and Cincinnati’s Kroger Co. (KR:US) as possible suitors.
Harris Teeter shares advanced (HTSI:US) 1.5 percent to $42.12, the highest price in more than six months, at the close yesterday in New York. Ahold rose as much as 0.3 percent to 11.01 euros and was trading up 0.2 percent at 12:11 p.m. in Amsterdam. The stock has gained 8.5 percent this year.
Harris Teeter disclosed this month that it hired JPMorgan after receiving advances from two private-equity firms, which the company didn’t name. Representatives at Harris Teeter, JPMorgan and Publix declined to comment, while a spokesman for Ahold said the company doesn’t comment on market rumors. An official at Kroger didn’t immediately return a call seeking comment.
Harris Teeter was co-founded in 1960 by two North Carolina grocers, according to its website. It has more than 200 stores in North Carolina, South Carolina, Virginia, Georgia, Tennessee, Maryland, Delaware, Florida and Washington, D.C. The company reported $4.54 billion in revenue for the year ended Oct. 2, 2012.
Earnings before interest, taxes, depreciation and amortization over the same period amounted to $306.5 million, according to data compiled by Bloomberg. Grocery companies typically sell at 7 to 10 times Ebitda, said one of the people familiar with the situation, indicating Harris Teeter’s sale value could be as much as $3.1 billion.
About 60 percent of Ahold’s sales come from the U.S., where it also owns Giant stores, according to data compiled by Bloomberg. The company has sold assets in the country over the last 10 years after an accounting fraud at an acquired business in the U.S. This month the Dutch company said it agreed to sell its 60 percent stake in Swedish grocery chain ICA for more than $3 billion.
Some brokerages including Barclays expressed skepticism that Ahold would buy all of Harris Teeter, suggesting that returning proceeds from the ICA deal to shareholders would be a better option than buying a grocer that competes against grocers including Wal-Mart Stores Inc. (WMT:US)
“We have already assumed in our model that Ahold will return the ICA proceeds to shareholders in the second half via a share consolidation,” Barclays analysts, including James Anstead in London, said in a note. “If the cash was instead spent on significantly increasing Ahold’s exposure to an industry which is undoubtedly competitive, then we would expect shareholders to be unimpressed.”
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