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Acquisition of Edah by Sligro Food Group and Sperwer Holding
The purpose of this meeting was to explain the background to the proposed acquisition of Edah by Sligro Food Group and Sperwer Holding, via presentations given by Messrs. A. Slippens, H. van Rozendaal and A. Voets. There would then be an opportunity to ask questions, after which the shareholders would be invited to approve the proposed acquisition.
What does the acquisition involve? (A.J.L. Slippens)
Mr. A. Slippens welcomed those present. In his presentation, he explained why Sligro Food Group was interested in acquiring the Edah stores, why it had been decided to work with Sperwer Holding and how that alliance had been formed.
With a view to the acquisition, Sligro Food Group Nederland B.V. and B.V. Sperwer Holding had formed a new private limited company under the name S & S Stores B.V. Each founder held 50% of the shares in S & S Stores B.V. The Edah activities would be purchased by this new private limited company.
The Edah transaction related to 223 Edah and Edah Lekker & Laag stores, together with 215 leases, eight parcels of real estate, the inventory, fixtures, fittings and facilities of all the stores and the cash reserves. Consumer sales generated by these stores in 2005 amounted to €880 million. The total retail floor area was 234,000 m². As well as the store staff (a total of 2,800 FTEs), staff at the distribution centres (400 FTEs, of whom 200 were agency staff) and overhead staff (74 FTEs) would also be transferred.
After the acquisition had been completed, Sligro Food Group and Sperwer would each withdraw 60 of the stores the S & S Stores B.V. portfolio and concert them over a period of about a year, at a steady rate of about one a week. In this first phase, some 30 of the stores owned by S & S Stores B.V. which were not a good fit for Sligro Food Group or Sperwer would be sold to third parties. Around two-thirds of the stores transferred to Sligro Food Group would be converted into Em-Té stores and one-third into Golff supermarkets. A decision on the future of the remaining 73 stores would be taken in the second phase, in early 2007. Until then, the Edah format would keep running.
Purchase price and financing (H.L. van Rozendaal)
Mr. Van Rozendaal provided information on the purchase price and its financing. The estimated purchase price of the Edah stores was €221 million. It was only possible to give an estimate, because the actual purchase price could not be determined until the date of acquisition since it depended on the value on that date of the assets, including inventory, fixtures, fittings and facilities and cash reserves. The actual purchase price might therefore be higher or lower than the estimate.
It was also important to note that the acquisition was purely an asset transaction. Liabilities such as trade creditors, employee benefit liabilities and tax liabilities would not be included in the transaction, but would accrue for the new owners immediately following the acquisition. The financing required was therefore reduced by the amount of these liabilities. The net purchase price to be financed was estimated at around €175 million.
Inventory, other property plant and equipment and intangible assets (goodwill) each accounted for about one-third of the gross assets. The goodwill was tax-deductible.
To finance the purchase price, Sligro Food Group and Sperwer would each make €80 million available to S & S Stores B.V. The rest of the capital would be borrowed by S & S Stores B.V. from bankers.
Sligro Food Group would also finance its contribution of €80 million with bank borrowing. It was not yet possible to say what Sligro Food Group's investment would ultimately be, firstly because the precise purchase price was not yet known, secondly because revenue would be generated by the transfer of the new Golff supermarkets to independent retailers, thirdly because revenue would be generated by the sale of some 30 stores to third parties in the first phase and, lastly, because revenue could be generated in the second phase, depending on the decisions made in that phase on the transfer of stores to independent retailers and/or the sale of stores to third parties.
Operational aspects (A. Voets)
Mr. Voets gave a presentation on various operational aspects of the acquisition of the Edah supermarkets.
His presentation covered the preparations which had already been made at Em-Té and Golff, the existing and new sites, the status of the integration process and the new store environment.
Preparations had started when the Edah stores were put on the market at the end of January. The updating of the Em-Té format, which had already commenced by then, had been speeded up. All 18 existing Em-Té supermarkets had been fully updated in week 25 and Em-Té's IT system was now fully integrated with the Sligro Food Group system. It would shortly be possible to connect the new stores to this system one by one. In May, Em-Té replaced its Perfekt own-label with the Markant own-label, which was already being carried by the Golff supermarkets. There had also been a harmonisation of the ranges carried by the Em-Té and Golff supermarkets. In the second half of this year, the entire distribution function would be relocated from Kaatsheuvel to Kapelle and Em-Té's head office would be moved to Veghel.
The experience gained with Em-Té had been utilised in the preparations at Golff. A pilot project had been launched in May at Oudewater which made good use of the lessons learned at Em-Té, with greater focus on fresh produce, service and hospitality. Product classifications had been revised, changes had been made to the range and a different positioning had been adopted on price. In-store communication has also been upgraded.
Mr. Voets then discussed the existing and new Em-Té and Golff stores. Em-Té currently had 18 stores, mainly in central Brabant. The average retail floor area was 1,100 m² and consumer sales averaged approximately €150,000 per week per store. There were now 57 Golff supermarkets in the Netherlands, roughly on a south-west/north-east axis. The average retail floor area of the Golff supermarkets was 800 m² and consumer sales averaged approximately €74,000 per week per store.
The addition of 38 new Em-Té stores in the first phase would extend the geographical coverage, but it would still be confined largely to the area south of the major rivers. A further 22 Golff stores would be added in the first phase, located mainly in the east and north-east of the Netherlands.
The aim was to integrate the newly-acquired Edah supermarkets into the Sligro Food Group organisation within about a year. While the stores were operating under the Edah banner, they would be supplied from the Someren distribution centre and the stores would continue to use the Laurus systems. The stores would be transferred from the S & S Stores B.V. portfolio at a steady rate of about one per week. The process of transferring the stores would be completed by the end of 2007.
As each store was transferred from S & S Stores to Sligro Food Group, the Edah format would be replaced by the Em-Té or Golff format. The Laurus systems would be replaced by the Em-Té systems and the staff would be transferred to Em-Té Supermarkets or the independent Golff retailer, as applicable. From then on, they would be supplied by the Kapelle distribution centre.
As for the look of the new stores, he said there was considerable scope for improvement at the existing Edah supermarkets. They showed signs of underinvestment, there were too few checkouts, the service level was low and there was little interaction between customers and staff. The key principles underlying the new Em-Té and Golff formats were: focus on fresh produce, attractive and comfortable stores with an element of surprise, keen pricing, professional and customer-centred staff and a wide range with added items from Sligro Foodservice. The aim was to increase sales – which would translate into lower relative wage costs – improve the margin and raise customer-awareness. Because the staff working on the supermarket floor were the major factor in achieving this aim, high priority was given to the human resources aspect, for example by organising various courses.
Conclusion (A.J.L. Slippens)
Outlining the status of the acquisition process, Mr. Slippens said that the transaction was at present being considered by the NMa, the Dutch competition authority, and that no significant problems were expected to arise in connection with this procedure. The Laurus staff council's positive recommendation was also awaited. Once these have steps had been completed, the acquisition could be finalised.
The sale of Edah and Konmar would mean a restructuring of the Dutch market and significant shifts in market positions. It gave Sligro Food Group a unique opportunity to take its place among the top five in food retailing in the Netherlands. In terms of total share of the Dutch food market, including foodservice, Sligro Food Group would in the top two.
The Edah acquisition involved a great deal of work. It was a complex exercise, requiring thorough analysis of all the risks. The conversion programme would start slowly and the pace would be stepped up once the process was running smoothly.
Appreciating their importance in the process, Sligro Food Group would be mindful of the interests of the Edah staff and would make every effort to offer them future employment as soon as possible. There were opportunities not just within the former Edah organisation, but elsewhere in Sligro Food Group.
The acquisition of Edah was expected to make a positive contribution to earnings per share from 2008 onwards.
The Chairman thanked the members of the Executive Board for their presentations and invited questions from the floor.
The first question came from Mr. Beijers (Orange Fund). The Laurus ICT systems would remain in use for the time being, to be replaced by the Sligro Food Group systems in due course. Would this require significant investment within Sligro Food Group? He was told that, after the transfer, an investment in ICT averaging around €25,000 per store would be needed. The main Sligro Food Group systems would not need to be modified. Connecting the stores to the existing system would be simple and would not require any further investment.
Mr. Beijers then asked whether purchasing via Superunie would encounter problems in competition law. He was told that, while the NMa was likely to examine the purchasing-market aspects, any problems which arose were expected to be soluble.
Lastly, Mr. Beijers asked how the 50% holding of S & S Stores B.V. shares would be accounted for in Sligro Food Group's books. Would it be consolidated or not? Mr. Van Rozendaal replied that S & S Stores B.V. would be accounted for as an associate and would therefore not be fully or partially consolidated. This was consistent with the 50/50 split between Sligro Food Group and Sperwer Holding, in terms of both their shareholding in S & S Stores B.V. and representation on the latter company's Executive Board. Owing to this accounting treatment, Sligro Food Group's turnover would not reflect the extra turnover until a store started to trade as Em-Té or Golff. Since conversion of the first of the stores would not start until the beginning of October, the increase in turnover in 2006 would inevitably be small. This steady inflow of new turnover would continue into 2008, because the store conversion programme would extend well into 2007.
Mr. Leenaers (Dutch Investors' Association VEB) was pleased that Sligro Food Group had convened a meeting to submit the proposed acquisition to the shareholders' approval and appreciated the additional information on the Edah acquisition which Sligro Food Group had provided in its press release of 20 June 2006, but still required a little more quantitative information. First, he enquired about the performance of the 73 stores which would remain in the S & S Stores B.V. portfolio after the first phase. Before answering this question, Mr. A. Slippens pointed out that, although they would stay in the S & S Stores B.V. portfolio longer than the other stores, this group of 73 stores would also be moved out of S & S Stores B.V. in the course of 2007. In answer to the question, he then referred to the Laurus figures, which showed that the Edah stores were making a loss. Mr. Van Rozendaal added that the situation within S & S Stores B.V. was different from that within Laurus, for example in that its overhead was lower. It had been indicated in the presentations that there would be some uncertainty in the transition period, and the position was not yet sufficiently clear to state precisely how things would go during that period. What was important was that the stores should contribute to profit after the transition period.
Mr. Leenaers then asked how much it would cost in total to upgrade the 60 stores in the first phase to the standard of the existing Em-Té and Golff stores. Mr. Voets answered that the total cost for the 38 new Em-Té stores was estimated at €15–18 million. The investment in the 22 new Golff stores would be borne by the independent retailers themselves.
In reply to a question on the profit targets for the new stores, Mr. A. Slippens said that the new stores would in due course be expected to meet the same profit targets as the existing Em-Té and Golff stores.
In reply to Mr. Leenaers' closing questions relating to the definitive financing structure, Mr. Van Rozendaal said that all the options were still open. The decision on what was to happen with the 73 remaining stores would, of course, affect the final choice. Although there was unlikely to be a share issue, that option was still available.
Next, on behalf of Darlin, Mr. Kers asked whether the stores would be transferred from S & S Stores B.V. to Sligro Food Group at book value and whether Sligro Food Group would be able to charge the goodwill against tax. Mr. Van Rozendaal explained that S & S Stores B.V. would buy the stores and would incur expenses, but would sell some of the stores to third parties. Sligro Food Group and Sperwer would each pay half of the net figure. Sligro Food Group's share in the net figure would represent the total cost of acquisition of the stores to be purchased by Sligro Food Group. As for amortisation of the goodwill, the issue was not whether but how quickly it could be charged against tax. This matter was currently the subject of discussion with the tax authorities.
Mr. Swinkels thanked the speakers for their clear presentations. He then asked whether Colruyt had expressed an interest in taking over some of the stores from S & S Stores B.V. Mr. Slippens replied that the media had been talking for years about the Colruyt coming to the Netherlands, but nothing had come of it so far.
Mr. Swinkels then asked why Sligro Food Group had decided on two formats, Em-Té and Golff, instead of one. Mr. Voets explained that Sligro Food Group had opted for two formats, at least in name, because it believed in a model whereby the branch organisation was completely separate from the franchise organisation (Em-Té being a branch organisation and Golff far franchise organisation). In the interests of maximum efficiency at stores in both formats, there were many shared elements.
Mr. Munnichs noted that turnover was down at many of the stores being acquired. He asked whether this would cause many problems, for example with fresh produce and sell-by dates. Mr. A. Slippens replied that the object of the acquisition was to recover sales. Sligro Food Group had based its choice of stores not on the turnover lost in the past, but on the catchment area served by the store, the retail floor area and the parking facilities.
Mr. De Boer (analyst at Petercam) thanked the Executive Board for the invitation and said the fact that the analysts had also been invited to this meeting was greatly appreciated by them. He then had asked the following questions.
Pending a decision on how the 73 stores were to be operated, the store staff were facing considerable uncertainty. How did Sligro Food Group intend to address this? Referring to the presentation by Mr. Voets, Mr. A. Slippens said that Sligro Food Group would be mindful of the interests of the staff, adding that all parties concerned in this acquisition had their own responsibilities. Sligro Food Group would seek to provide a 'light in the darkness' for all staff throughout the process.
In reply to a question by Mr. De Boer as to the split between Edah and Edah Lekker & Laag within the group of 60 stores which Sligro Food Group is to acquire in the first phase, Mr. Voets informed him that Edah Lekker & Laag accounted for about one-third of the total.
Mr. De Boer then asked how much turnover growth was needed to meet the profitability targets. He was told that the aim was to recover the sales volume lost in the past two years: around 20%. This was, however, only a rough approximation based on averages, because by no means all stores were operating at a loss.
In response to Mr. De Boer's next question, Mr. A. Slippens explained that it was not necessarily the most heavily loss-making stores which would be converted first. All kinds of practical factors were involved in deciding the sequence, such as the logistical aspects during and after the conversion work.
In reply to his final question, Mr. De Boer was told that Em-Té would be concentrated largely south of the major rivers. Sperwer's format, plus, had broader national coverage and Sperwer's new stores would enable it to extend its coverage.
Mr. Waardenburg asked whether it would not be better for Sligro Food Group to reduce the number of store formats and why it had not decided to opt solely for Golff, because Em-Té was not sufficiently well known. Mr. Voets explained the formats and the differences between them. Each format had its own profile and was equipped to address its territory with maximum effectiveness. The Meermarkt format, for example, consisted of neighbourhood supermarkets with fewer service elements, a different margin structure and a different wage cost structure, and it would be difficult to incorporate those stores into a full-service concept. Within the full-service supermarket sector, Sligro Food Group had, as already explained, opted for clear segregation between the branch organisation and franchise organisation. As to consumer-awareness of the Em-Té brand, Mr. Voets observed that the most important thing was to ensure that consumers knew where to find the new Em-Té and Golff stores.
Mr. Boom asked what would happen to the staff (approximately 200 FTEs in total) of the Someren distribution centre when the lease expired on 31 December 2007. Mr. Slippens explained that the permanent staff (around half of the total of 400 FTEs) would be transferred to S & S Stores B.V. After the conversion phase, these employees would as far as possible be placed with Sligro Food Group and Sperwer companies: mainly in Veghel, Nijmegen, Haps, Helmond, Den Bosch, Eindhoven, Weert and Venlo in the former case and Ittervoort in the case of Sperwer. This was being anticipated at those sites by not extending temporary contracts and reducing usage of temporary staff.
Mr. Vos (analyst at Fortis) said that the figure of €15–18 million for Sligro Food Group's investment in the 60 new stores was news to him. Mr. Van Rozendaal explained that it had been announced previously that, while there would be little or no increase in Sligro Food Group's total investment programme, investment would be shifted within Sligro Food Group from food service to food retailing.
Mr. De Boer enquired about turnover at the Edah stores in 2006. Mr. Van Rozendaal said that consumer turnover at the 223 Edah stores in 2005 totalled €880 million and that the turnover index was still negative.
In response to the statement by the Executive Board that the new Em-Té stores would be concentrated mainly in the south of the Netherlands, Mr. Swinkels observed that there was no reason why the Em-Té format could not also be used north of the rivers and asked if there were any plans in that regard. Mr. A. Slippens expressed admiration for Mr. Swinkels' enthusiasm, but answered that no such plans were currently under consideration.
There being no further questions, the chairman invited to the shareholders to approve the proposal. Ms. Fakkel, acting on behalf of two shareholders, cast 29,126 and 258,140 votes against. There were no other votes against the motion and the proposal was approved. |
