Saturday, June 30, 2007

Sale of U.S. Foodservice still on track, Ahold says

By Andrea K. Walker
Sun reporter
Originally published June 28, 2007

The parent of Columbia-based U.S. Foodservice said yesterday that the sale of the food distributor remains on track despite the failure of a bond sale intended to help finance the deal.
Dutch food company Royal Ahold, which also owns Giant Food, agreed in May to a $7.1 billion deal to sell U.S. Foodservice to private equity firms Clayton, Dubilier & Rice and Kohlberg Kravis Roberts & Co.

On Tuesday, U.S. Foodservice postponed plans to sell $650 million in senior notes because of weak market conditions, an Ahold spokeswoman confirmed yesterday.

This came after the deal was restructured several times over the past week, according to research firm KPD Investment Advisors Inc.

The original offering was for $1.55 billion - $1 billion in toggle bonds and the remaining $550 million in senior subordinated notes. Toggle bonds allow the issuer to pay interest in additional debt as an alternative to cash.

In response to investor pushback and weak market conditions, U.S. Foodservice restructured the deal - trimming the note sale to $450 million and making it a private sale, but increasing the amount of toggle notes to $1.1 billion and making half of those cash-paying. Investors still were not willing to buy, so Ahold restructured the deal again, leaving $650 million of senior notes.

"We don't expect any consequences for the transaction," said Caro Bamforth, an Ahold spokesman in the Netherlands.

Bamforth wouldn't comment on how the buyers now expect to finance the deal.

Deutsche Bank, lead underwriter in the bond deal, also declined to comment.

But a person close to the acquisition said the deal is not in jeopardy because it included a contingency for "bridge" financing if debt investors showed no interest in the deal.

"It's going to be financed by the banks from this situation," the person said. "When they got into this the banks agreed to do this - to backstop the debt offering."

The banks will try to resell the bonds later in the year.

The problems financing the U.S. Foodservice deal have raised concerns about sudden weakness in the market for private-equity buyouts. Rising interest rates and underwriters who want better deals have hurt recent buyout plans.

"It's a more expensive market," said Bill Schultz, chief investment officer at McQueen, Ball & Associates in Pennsylvania. "That's why you see some of these deals pulled."

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