Delhaize - Selling Sweetbay, Harveys and Reid’s for $ 265m

Delhaize has reached an agreement with Bi-Lo Holdings, LLC on the disposal of Sweetbay (72 stores), Harveys (72 stores), and Reid’s (11 stores) for $ 265 million in cash. As part of the transaction, Bi-Lo Holdings will also acquire leases for 10 prior Sweetbay locations. Delhaize will retain Sweetbay’s distribution center. In 2012, the 165 stores included in the transaction generated revenues of approximately $ 1.8 billion (10% of Delhaize America’s sales). Note that Sweetbay was loss-making but this was offset by Harveys’ profits. In total, the 165 stores were marginally profitable. The transaction will probably result in a disposal loss of $ 20-40m despite the impairment charges that were booked in the past.

Bi-Lo is taking over $ 90m finance leases but Delhaize remains liable if Bi-Lo defaults. For Delhaize, charges related to operational leases will decline by $ 32m annually. The distribution centre which has an estimated value of $ 15-20m will be sold separately.

Our view
The price tag is in line with our estimate (see our Morning Note of 24 May). Roland Smith who was appointed EVP and CEO of Delhaize America last year has clearly started to streamline the business. Food Lion’s (75% of Delhaize America’s sales) repositioning proves to be a success and Bottom Dollar Food’s losses are declining. We expect that Delhaize will exit some countries in SE Europe such as Bosnia, Bulgaria, Herzegovina and Montenegro. Delhaize Belgium is still struggling to reverse the market share declines. We are not convinced that a return to historic strengths (assortment, quality, health) will be sufficient to reverse the negative market share trend in Belgium. Moreover competition is becoming fiercer. Lidl has launched an aggressive campaign (“Lidl client saves 39%”) this week.

We are raising our target price from € 52 to € 55 and maintain our Accumulate rating.