Food Lion Conquers Hannaford Warren Gump (TMF Gump)
August 18, 1999
Grocery chain Food Lion (Nasdaq: FDLNA) announced a definitive merger agreement to acquire Hannaford Bros. Co. (NYSE: HRD) in a cash and stock deal valued at $79 per share, a 36% premium to Hannaford's close last Friday. About 80% of the acquisition price will be in cash, with the remainder paid in Food Lion stock. Hannaford operates stores in both the Northeast (Maine, New Hampshire, Vermont, Massachusetts, and New York) and the Southeast (Virginia, North Carolina, and South Carolina).
Competition in the grocery business has been increasing for some time as low-cost discounters have been invading the notoriously low-margin grocery business. Wal*Mart (NYSE: WMT) and Kmart (NYSE: KM) have been aggressively building superstores that contain full-line grocery stores as well as general merchandise, while membership clubs like Sam's, Costco Cos. (Nasdaq: COST), and BJ Wholesale Club (NYSE: BJ) have also been selling food at rock-bottom prices.
Existing grocery chains are fighting this new competition by going on an acquisition binge, assuming that the company with the most sales will win the war through operating efficiencies and clout with manufacturers. Recent deals include Albertson's (NYSE: ABS) acquisition of American Stores, Kroger's (NYSE: KR) purchase of Fred Meyer, and Safeway's (NYSE: SWY) buy of Texas-based Randall's. Over the past five years, this acquisition spree and internal growth has caused the market share of the 10 largest grocery chains to jump up to 50% from 30%.
The Hannaford takeout price of $79 surprised most analysts, who were expecting a price in the $65-$70 range. Part of the reason for this high price is a behind-the-scenes bidding war between Food Lion and Ahold of the Netherlands. Ahold has been an aggressive acquirer of east coast chains, with the recent purchase of Giant Food (Md.) and a pending acquisition of Pathmark; they join a portfolio that already includes BI-LO, Giant (Carlisle, Pa.), Stop & Shop, and Tops.
Food Lion stock plunged on today's news because of the high price it is paying for Hannaford. Based on reported 1998 results, the company is paying 1.2x sales and 22x operating profit. Putting that in context, Kroger expended 0.9x sales and 16x operating earnings for Fred Meyer, while Albertson's paid 0.6x sales and 15x operating profit for American Stores.
Hannaford shareholders should certainly be pleased that they are getting an amazing offer for their company. As for Food Lion, this deal makes it only the sixth largest company in the industry; shareholders should hope that their management team has a strategy to compete against its larger competitors and avoid a Pyrrhic victory.