Ahold (Overweight, Price Target €20) and Delhaize (Overweight, Price Target €91) yesterday confirmed what was discussed in the press at the weekend – namely that the two companies are discussing the possibility of a merger. The possible combination has long looked potentially interesting – and this has only become more compelling as a number of longstanding sticking points have been eliminated on both sides, while consolidation has recently accelerated in the US market. The limited success of a number of large retail mergers in the past has left the market understandably wary – but we would expect these two companies to resist much change within individual banners, focusing on buying better and reducing cost. This could limit synergies, but also execution risk.
Synergy potential: Retail deals typically aim for synergies of 1.0-2.0% of sales. We think that may be difficult here as we assume: i) buying synergies achievable in the US would likely be limited by the Robinson-Patman Act; ii) this possible merger would likely be a combination of adjacent chains rather than a root-and-branch integration. Assuming synergies are 1.0% of sales and that half is reinvested into price, we can foresee c13% accretion to combined EBIT and c15% to net income. This may be cautious and – unlike many retail mergers – might come with relatively limited execution risk.
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