Ahold Shares Collapse on Accounting Scare

February 24, 2003
By Melanie Cheary and Trevor Datson

AMSTERDAM/LONDON (Reuters) - Ahold, the world's number three retailer, lost two-thirds of its market value on Monday after it said U.S. profits had been overstated and it ditched its chief executive and chief financial officer.

The owner of the U.S. Stop & Shop and Giant franchises and Dutch supermarket leader Albert Heijn shocked investors as it disclosed a $500 million profit overstatement that served as a chill reminder of past accounting scandals.

"Is 'Ahold' Dutch for 'Enron'?" asked one pan-European share dealer in London.

The scale of Ahold's problems is unlikely to match that which brought oil giant Enron and telecoms group WorldCom to their knees, but the retailer's shares collapsed in Amsterdam and New York and bond investors fled.

"Ahold's accounting irregularities revive unpleasant memories. This is the main driver of the share price today as an investor just cannot trust the company's figures," said John Hatherly, head of global analysis at M&G Asset Management.

Ahold, which warned on earnings twice last year amid weak consumer demand, said 2002 net profit would be "significantly lower" than expected after the overstatement of earnings at its key U.S. Foodservice distribution business in 2001 and 2002.

The overstatement -- most of which related to fiscal 2002 -- could have exceeded $500 million at operating level, the company said. Ahold makes 60 percent of its profits in the United States, operating 1,600 stores along the eastern seaboard.

The company, which has over 12 billion euros ($12.90 billion) in net debt, previously forecast a six to eight percent fall in 2002 earnings per share before one-offs and goodwill. It delayed release of its results, which were due on March 5.

Ahold, which in the second quarter reported its first net loss in almost 30 years, said it would have to restate earnings for 2000, 2001 and last year's first-half results.

Chief Executive Officer Cees van der Hoeven and Chief Financial Officer Michael Meurs will resign, Ahold said. Henny de Ruiter, who is currently chairman, will take charge until they can be replaced.

STRING OF SCANDALS

The irregularities unearthed at Ahold's U.S. Foodservice business involved local managers booking far higher promotional allowances -- provided by suppliers to promote their goods -- than it actually received in payment, the company said.

Ahold is also examining the legality of some transactions at its Argentine subsidiary Disco, but said it could not yet quantify the impact any irregularities would have.

Last year, Ahold was forced to buy out its partner in Disco, Argentinian group Velox, which had defaulted on its debts.

Ahold's U.S. Foodservice unit is the second-largest food distributor to restaurants, hotels, healthcare institutions and sports facilities in the United States after Sysco Corp.

Mark Husson, an analyst at Merrill Lynch in New York said concerns that could arise from U.S. Foodservice accounting could lead to some customer defections, which would benefit Sysco.

"We think Sysco accounting is good. Somehow the Ahold business got caught up in chasing earnings with very high targets and cut corners to get there," added Husson, who rates Sysco shares a "buy."

DEBT FEARS

Ahold, Europe's second-biggest retailer, has been dogged by uncertainty since the middle of last year when management was forced to clarify discrepancies between its results according to Dutch and U.S. accounting rules.

Disclosure issues also hit the shares after the group published a surprise trading update in October amid concerns that some sales numbers had leaked out prematurely.

Shares in Ahold plunged 63 percent to 3.63 euros in afternoon trade after earlier sliding to 2.91 euros -- their lowest since mid-1988. The New York-listed ADR fell a similar amount to $3.92.

The company's debt also suffered. According to Reuters data, Ahold's 5.875 percent euro bond due March 2012 was bid at around 69 percent of face value at 1610 GMT, down more than 27 points since Friday.

It yielded a huge 770 basis points more than low-risk government debt, 520 basis points up from Friday's close.

Credit rating agency Standard & Poor's cut Ahold's long-term corporate credit ratings on Monday to BB+, a level often referred to as "junk" grade. Other rating agencies either downgraded Ahold or said they were considering such a move.

With the company's earnings hit at operating level by the overstatement in accounts, cash flow and Ahold's ability to service its debt could come under pressure.

Ahold said it had secured 3.1 billion euros ($3.4 billion) in new funding from a syndicate of banks to support its liquidity position, a move it said left it fully funded. The company declined to name the syndicate banks.

INVESTIGATIONS TO CONTINUE

In a move seen by some analysts as an attempt to shift debt out of Ahold's balance sheet, the company said it would partly deconsolidate its interests in three subsidiaries -- Swedish ICA Ahold, U.S. Jeronimo Martins and Disco.

The three, which have until now been fully consolidated in the Ahold parent company's financial statements, will only be partly included with effect from the 2002 fiscal year, and historical accounts will be restated.

It said an investigation into the accounts of U.S. Foodservice was continuing by outside legal counsel and independent forensic accountants. Some senior executives of the unit's purchasing and marketing management team have been suspended but Ahold declined to name them.

De Ruiter told a teleconference that the issues in the United States and Argentina had been discovered very recently by auditors Deloitte & Touche in their review of the 2002 accounts.

"All these things arose from the 2002 audit," he said, declining comment on whether other board members would resign.

"My priority will be to stabilize the business and get to the bottom of the problems... I am not in the least bit pessimistic about where we will be in a year from now," he said.

Ahold's biggest shareholders -- all with stakes of at least five percent -- include Benelux bancassurer Fortis and Dutch insurance companies ING and Aegon. Shares in all three fell on the news.

The Dutch group has taken a knock from difficult trading conditions and its enormous exposure to the world's biggest economy, making it vulnerable to any downturn there.

In November it announced a three-year restructuring plan to dispose of non-core investments in order to generate higher cash flow and reduce its debt levels.

De Ruiter said that this restructuring would continue.

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