Royal Ahold Sells U.S. Foodservice to Private-Equity Firms

By Tomoeh Murakami Tse and Krissah Williams
Washington Post Staff Writers
Thursday, May 3, 2007

Royal Ahold, a Dutch supermarket operator and owner of Giant Food, yesterday agreed to sell Columbia-based U.S. Foodservice to two private-equity firms for $7.1 billion in a deal that would end a transatlantic partnership troubled by financial scandal.

The deal comes six months after Ahold said it would sell U.S. Foodservice, which distributes food to hotels and restaurants, and focus on reviving its flagging supermarket operations. Under the transaction, U.S. Foodservice would be acquired by New York private-equity firms Clayton, Dubilier & Rice and Kohlberg Kravis Roberts.

"We are pleased to be partnering with two outstanding firms -- two of the oldest private equity firms in the business -- which have a great understanding of our industry, from both a financial and operating standpoint," Robert Aiken, president of U.S. Foodservice, said yesterday in a statement. "We have great confidence the strategic and financial support of these two firms will enable us to grow and better serve our customers."

Ahold has been under pressure from investors to sell off its U.S. operations, which are struggling with weak sales and intense competition. Following a six-month review of its assets and corporate strategy, the company said in November that it would divest U.S. Foodservice to focus on its core retail business. Ahold is also in the process of finding a buyer for Tops supermarkets, but the company yesterday reiterated its plan to hold onto Giant.

Selling U.S. Foodservice "returns Ahold to a purely retail-focused company, and Giant is certainly a part of our portfolio in the United States," said Kerry Underhill, an Ahold spokesman.

The sale agreement comes just days after the surprise announcement by Ahold chief executive Anders Moberg that he would step down as of July 1. Moberg was brought in to restore the Amsterdam company's credibility and financial stability after a 2003 accounting scandal at U.S. Foodservice left some analysts wondering whether Ahold could survive.

Ahold was forced to restate more than $800 million in earnings after it came to light that U.S. Foodservice executives had inflated promotional rebates from suppliers to meet earnings targets. The scandal caused the parent company's shares to plunge.

Ahold settled with the Securities and Exchange Commission two years ago and agreed to pay $1.1 billion to resolve shareholder lawsuits. While dealing with the legal fallout, Moberg rebuffed calls from investors to sell U.S. Foodservice and set about closing outdated Giant stores and cutting costs at others.

The sale announced yesterday has been in the works for a few months and attracted significant interest from prospective buyers, Ahold said. The deal, which must be approved by shareholders at a special meeting scheduled for June 19, could close in the second half of this year.

"I am extremely pleased to be able to announce that we have reached this important milestone for U.S. Foodservice, for Ahold and for our shareholders," Moberg said in a statement yesterday. "We have focused on restructuring U.S. Foodservice, strengthening its capabilities and restoring profitability."

One of the two buyers, Clayton, Dubilier & Rice, has made investments in the food-service business in the past decade, including in Alliant Foodservice, which it sold to Ahold in 2001.

"U.S. Foodservice is well positioned in a stable and growing industry that we know well from prior investments," said Richard J. Schnall, a principal at CD&R. "We plan to leverage the company's strong national and local market positions in the nearly $200 billion U.S. food service industry to accelerate growth in both revenues and profitability."

Ahold bought U.S. Foodservice in 2000 for $3.6 billion. It accounts for 47 percent of Ahold's U.S. operations and 34 percent of its total sales.

When Ahold acquired U.S. Foodservice, the industry consensus was that it overpaid, said Robert S. Goldin, an executive vice president at Technomic, a food consulting firm in Chicago. Industry analysts had previously estimated U.S. Foodservice could be worth $5.1 billion to $5.7 billion. Yesterday, Goldin and other industry experts said Ahold got top dollar.

"For Ahold this is a reasonably good end to what's been a pretty unsuccessful foray into U.S. food distribution," he said. "It's been a sore spot for them. They overpaid for the business and never rationalized it. I would imagine they are pretty happy to put this one behind them."

U.S.-traded shares of Ahold rose more than 7 percent yesterday to close at $13.65.

Staff writer Ylan Q. Mui and staff researcher Richard Drezen contributed to this report.

© 2007 The Washington Post Company