Noted: Should Tesco stop & shop for Ahold?
ING analysts Peter Brockwell and John David Roeg think there is a “compelling strategic logic” for a deal.
The pair say buying Ahold’s established U.S. business would be a way of quickly turning round Tesco’s fledgling, and loss-making, business Fresh & Easy, with Tesco funding a deal with cash, shares and disposals.
A tie-up with Ahold would also make sense for domestic rival Delhaize, although given that Ahold is twice its size, any transaction would have to be a stock-based merger, they add. Most other potential predators lack the necessary financing, a strategic rationale to do a deal, or synergies, the ING team reckons.
From the note:
“Ahold’s substantial undervaluation could trigger a takeover.
“We see three possible scenarios: (1) nothing happens, the undervaluation persists; (2) management tries to reduce the gap through more ambitious growth targets/capital restructuring; or (3) predators could eye Ahold’s quality assets.
“Among potential industry buyers, Tesco is our favourite.
“Tesco should be able to finance a potential €12.8 per share bid. Tesco’s 2011F EPS could rise by an extra 14-20% depending on the net amount of synergies, which we conservatively estimate at £493m. Pretax returns on capital employed (including GW) could increase by 110bp in 2011F to 21.8%, only marginally less than Tesco on a standalone basis.
“The US market is too big for Tesco to ignore, yet any attempt to increase the scale of Fresh & Easy could prove very risky. Ahold should be viewed as a one-off opportunity to acquire an undervalued asset at a low point in the US consumer cycle.”