Food giant Ahold says it overstated '01, '02 earnings Accounting irregularities at a Md. subsidiary force Dutch owner to backtrack

THE BALTIMORE SUN

Dutch food giant Royal Ahold NV said yesterday that it overstated earnings for 2001 and 2002 by at least $500 million as a result of accounting irregularities at its Columbia-based U.S. Foodservice subsidiary, making it the latest on a growing list of corporations that have been tainted by financial scandal.

The world's third-largest retailer said Chief Executive Officer Cees van der Hoeven and Chief Financial Officer A. Michiel Meurs have resigned and the company has begun an investigation that will force it to delay the release of fourth-quarter earnings figures.

Company officials said a "small number" of employees at U.S. Foodservice have been suspended pending the investigation, but Chief Executive James Miller is not among them.

The latest news comes on top of disappointing earnings results and the downgrading of the company's corporate bonds to near junk status.

Investors punished Ahold's U.S. shares yesterday, sending them down $6.53 to close at $4.16, a decline of about 61 percent for the day.

In addition, shares of financial companies ING Groep and Aegon NV, which have direct investments in Ahold, fell 7.1 percent and 6.9 percent, respectively.

Ahold officials and analysts said the damage won't spread to the company's U.S. grocery store operations, which include Landover-based Giant, Stop & Shop, Tops, Bi-Lo and Bruno's supermarket chains.

But that didn't stop some from drawing comparisons between Ahold's troubles and those of other tarnished corporations in the past two years.

"It could be the new Enron or it could be a new Kmart," said Alexandre Casas, an analyst for CDC IXIS Securities in Paris. "Five-hundred million dollars in just two years - it's incredible. It's no small amount."

Ahold, which trails only Wal-Mart Stores Inc. and France's Carrefour SA in size, has been on a $19 billion spending spree credited with transforming the company into the world's largest food distributor.

A corporate celebrity

Before his ouster, Van der Hoeven, named 2001 retailer of the year in the United States, was regarded in Europe as somewhat of a corporate celebrity.

But his reign has been called into question repeatedly in the past year as Ahold issued a string of bad news to investors. Rumors of his imminent departure reached such a pitch in October that the company officially denied them as "complete nonsense."

But the doubts surfaced again a month later, when The Economist began a profile with the sentence: "Why is Cees van der Hoeven still in charge of Royal Ahold?"

Analysts have questioned his aggressive expansion strategy, which included buying 50 companies and boosting debt to 12.3 billion euros by last fall.

Among those acquisitions was the March 2000 purchase of U.S. Foodservice, which specializes in selling food and equipment to restaurants, hotels, hospitals and cafeterias. At the time, the $3.6 billion deal was hailed as a perfect marriage that would serve as a "platform of innovation" between the institutional food services business and the retail grocery business.

But there was something wrong with the way U.S. Foodservice was accounting for so-called "promotional allowances," which are incentives many suppliers in the food business offer to distributors in an effort to boost sales.

Ahold Chairman Henny de Ruiter, who stepped in as chief executive yesterday, said in a conference call with analysts that the subsidiary overstated sales as a result of the accounting treatment for such allowances.

"We don't know how or why they did it," said Sharon Christians, a spokesman for Ahold in Zaandam, Netherlands. She said the error bears no resemblance to scandals that took down energy trader Enron Corp. and telecommunications giant WorldCom Inc.

"This is not a sales issue," she said. "We have real sales and real profits. It's a very easy sound bite, but it bears no resemblance."

Food vendors offer a variety of promotional allowances to distributors such as U.S. Foodservice in a bid to win their business. Often, the deals amount to give-backs in exchange for a pledge to sell a certain amount of product, analysts said.

Trouble can result when companies book the allowances as income, or sales, before the money is in the bank.

Minneapolis food distributor Nash Finch Co., retail giant Kmart Corp., and A&P; of Montvale, N.J., have all had to restate earnings as a result of vendor allowances that were treated improperly. The Federal Accounting Standards Board is drafting new standards that will provide companies with a guideline for accounting for the complex arrangements.

"In the past, companies have had a fair amount of discretion," said Andrew Wolf, an analyst with BB&T; Capital Markets in Richmond. "The industry practice clearly leaves room for abuse. You're giving people the promise of a lot of money up front, and that can lead to a recognition of something as income before it's earned."

While this is hardly a new problem within the retail industry, analysts were surprised to see a company with Ahold's reputation get caught with its guard down - especially in the post-Enron era of financial scrutiny.

"Ahold and its subsidiaries would be one of the last companies I would think of when thinking of accounting irregularities," said Neil Stern, a partner at consulting firm McMillan & Doolittle.

'Profitable and viable'

A spokesman for U.S. Foodservice declined to comment on the investigation but said the company remains a "profitable and viable business," generating $17.5 billion in revenue for 2002.

A spokesman for Giant referred questions to Ahold's corporate headquarters in the Netherlands. In his conference call, de Ruiter said he has no plans to break up the company, which was founded in 1887. And he said the turmoil will not affect U.S. retail operations, which include Giant supermarkets.

"The investigation is related to Ahold foodservices, and we have no reason to believe the effects on U.S. retail are there," he said.

Ahold is in the middle of a three-year effort to cut its debt by selling non-core business units. But that effort was unveiled before yesterday's announcement about earnings.

New credit line

The company said it has replaced its existing credit line with a new 3.1 billion euro line of credit from a group of banks it did not identify. Standard & Poor's cut Ahold's long-term credit rating two notches, to BB+ from BBB.

In addition to the U.S. Foodservice investigation, Ahold said it also is investigating the legality of certain transactions related to Disco, an Argentine subsidiary the company bought after its partners defaulted. Ahold's Christians declined to provide details on that investigation.

Deloitte Touche Tohmatsu, the world's second-largest accounting firm, is Ahold's auditor. Deloitte suspended the 2002 audit pending investigations, Ahold said.

"We stand by the work we did for Ahold," said Oriana Pound, a spokeswoman for Deloitte.

Staff writer Robert Little, Bloomberg News and the Associated Press contributed to this article.

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