While the US subsidiary of Delhaize SA is mulling its proposed parent buyout, analysts are speculating that the Belgian food retailing behemoth will need to increase its offer. "Le Lion" has offered just US$2bn for the remainder of its 43%-owned US unit, which is low even when it is considered that prospects for the company are not particularly bright.

When William McCanless became CEO in July 1999, he promised to rejuvenate the share value of the Salisbury, N.C.-based Delhaize America. However, industry-wide problems in the grocery sector, the too-pricey acquisition of Hannaford Bros. Co. in August 1999, poor sales performance and concern over the competition offered by Wal-Mart have led the company to a battering on the NY stock exchange.

Nevertheless, operating more than 1,400 across the eastern US, Delhaize America accounts for 80% of the Delhaize Group's profits, and 70% of its revenue, and the offer is undervaluing the US subsidiary by six to seven times its EBITDA, or earnings before interest, taxes, depreciation and amortization. A spokesman for the Delhaize Group, Michael Geczi, stated however that the company thinks it has "provided a fair offer, based on comparable deals that have taken place."

The current offer values Delhaize America shares at about US$17 each. This is about US$1 less than they are actually trading at, and considerably less than the US$20 figure announced with the first offer of a deal on 7 September. But the offer of 0.35 Delhaize share for every Delhaize America share does reflect the current situation of Delhaize America stock on the Brussels bourse.

At Merrill Lynch, analyst Mark Husson conceded that this price looks reasonable compared with this year's earnings, but adds that compared to the Wall Street consensus of $1.61 a share for 2001, the offer is "very cheap - below the bottom of the range." Wall Street will not officially evaluate the offer until the results from Delhaize America's Q3 earnings are announced and Husson has raised his recommendation from "hold" to "accumulate." The offer is causing much speculation amongst shareholders, but there are substantial risks to be considered in holding.

Shareholder Ben White commented: "I'm sure they're not going to like (the offer). Personally I don't think Delhaize is offering fair value for the company," and analyst Edward Comeau, for Donaldson, Lufkin & Jenrette, believes: "They're likely to wiggle the number a little bit higher." Meredith Adler, analyst at Lehman Brothers, added, "The market clearly believes the offer will be sweetened."

Other concerns about the offer revolve around the currency risk, which would mean shareholders at Delhaize America were left with stock traded in euros. This, says the Delhaize Group, was part of a strategy to simplify the corporate structure and provide shareholders with values that reflect the entire of the company's operations. Geczi said that the current stock price reflects that it "is not attractive to investors. The strategic imperative here is to put these operations together and make it simpler for investors with a combined security."

An independent committee has been established, consisting of four Delhaize America directors, which will review the offer and decide whether to recommend it to its rank and file shareholders. The share protection law in North Caroline states that 95% agreement of shareholders is required in a takeover, meaning that without the support of this committee the buyout may not be able to go ahead. The verdict is expected within three to five weeks, but a spokesman for Delhaize in Brussels, Geoffroy d'Oultremont, believes it is "too early to say" whether the offer could be raised.