Royal Ahold announces serious financial irregularities
The Dutch-owned retail and food giant, Royal Ahold, has reported serious irregularities in the 2001 and 2002 earnings statements of its US-based subsidiary, US Foodservice, putting many observers in mind of the now infamous Enron and WorldCom accounting scandals.
According to Ahold, shareholders will suffer an immediate pinch, as the firm's net earnings and earnings-per-share under Dutch GAAP and US GAAP will be much lower than previously indicated for the year ended 29 December 2002, due in main to overstatements of income related to promotional allowance programmes at Ahold-owned US Foodservice, which are now under investigation.
Massive overstatement Based on information obtained to date, the company believes that operating earnings for fiscal year 2001 and expected operating earnings for fiscal year 2002 may have been overstated by more than US $500 million, most of which affects the fiscal year 2002.
Ahold's financial statements for fiscal year 2001, and the first three quarters of fiscal year 2002, are to be restated as soon as possible. Ahold's auditors have suspended the fiscal year 2002 audit pending completion of the investigation.
Other subsidiaries The company has also been investigating, using forensic accountants, the legality of certain transactions, and the accounting treatment of those transactions, at its Argentine subsidiary, Disco.
The investigation into Disco's accounts has already uncovered a number of transactions which are questionable, and Ahold is reviewing changes that may need to be made at Disco, including management changes, but no final decisions have been made as yet.
The company has offered no comment on the financial impact of the Disco investigation, saying only that a full investigation and analysis is underway.
In the US, Ahold operates well known retail brands including Stop & Shop, Giant-Landover, Giant-Carlisle, Tops, BI-LO, Bruno's, US Foodservice, and Peapod.
In the Netherlands, the group operates a number of smaller brands including Albert Heijn, Schuitema, Etos, Gall & Gall, Deli XL, ICA, Ahold Polska, Ahold Czech Republic, Ahold Slovakia, Ahold Supermercados, and Jeronimo Martins.
In South America, the group operates Bompreco, G. Barbosa, Disco, and Santa Isabel, while in Central America it operates CARHCO, La Fragua, and CSU.
And in Asia, Ahold operates brands including CRC Ahold (Thailand), Tops Retail (Malaysia), and PT Ahold Indonesia.
CEO and CFO both resign As a result of the unwelcome scandal, Ahold's president and CEO, Cees van der Hoeven, is to resign after an appropriate handover period. For the same reason, the company's CFO, Michael Meurs, will also resign, staying only long enough to effect an orderly transition of affairs.
The Chairman of the Supervisory Board, Henny de Ruiter, is to assume responsibility for the daily supervision of the Executive Board, and the business affairs of the company.
Furthermore, pending the conclusion of the US Foodservice investigation, certain senior executives of the US Foodservice purchasing and marketing management team have also been suspended from duty.
New liquidity support To support the company's liquidity position, Ahold has now obtained commitments totalling Euro 3.1 billion (US$3.33 billion) from a syndicate of currently unidentified banks, including a Euro 2.65 billion (US$2.85 billion) credit facility, and a Euro 450 million (US$484.2 million) backup facility.
The new finance is intended to replace the company's existing US$2 billion credit facility (under which US$550 million has already been drawn), as well as to provide the additional liquidity.
Debt reduction plan In November 2002, Ahold announced a three-year plan to increase free cashflow and reduce debt. That plan is still being followed through actively, and capital expenditures are now falling under strict scrutiny.
Cost reduction programmes have been implemented throughout the company, and the disposal of non-core businesses (and consistently under-performing core businesses) is proceeding according to plan, according to Ahold's most recent financial statement. Furthermore, the scope of the divestment programme is to be expanded to strengthen those core businesses in stable and profitable markets.