Standard & Poor's Ratings Services today placed on CreditWatch with positive implications its 'BBB-/A-3' long- and short-term corporate credit ratings on Belgium-based food retailer Delhaize Group (NYSE: DEG). We also placed on CreditWatch positive our 'BBB-' issue ratings on the group's senior unsecured debt instruments.

The CreditWatch follows the announcement that Delhaize will merge with its competitor, Netherlands-based food retailer Koninklikje Ahold N.V. (Ahold) (see "Netherlands-Based Food Retailer Ahold 'BBB/A-2' Ratings Affirmed On Planned Merger With Delhaize; Outlook Stable," published June 25, 2015, on RatingsDirect). Delhaize shareholders will receive 4.75 of Ahold's shares for each one of their shares. Ahold shareholders will own approximately 61% of the combined entity; Delhaize shareholders, about 39%. Ahold will be the only listed entity, and the combined group will be renamed Ahold Delhaize. Extraordinary shareholder meetings to approve the transaction will likely take place in the first half of 2016, and the group does not expect to receive regulatory approvals until mid-2016.

In our view, the transaction could strengthen Delhaize's "satisfactory" business risk profile. The combined entity would generate revenues of about €55 billion in more than 6,500 stores, with strong positions in the U.S., Benelux (the economic union comprising Belgium, the Netherlands, and Luxembourg), and Cental and South Eastern Europe. This should put the combined Ahold Delhaize close to or into the top-10 food retailers worldwide.

The improvement in the combined group's purchasing power, the wider range of product offerings, and the higher number of pick-up points, which should also be beneficial to the e-commerce offering, would likely enhance the group's competitive position. We also believe that improved sourcing and a reduction in general and administrative expenses from the third year following the transaction should generate synergies of about €500 million.

The impact on the combined group's financial risk profile is still uncertain. Although the anticipated synergies are beneficial to our leverage ratios, these advantages would entail meaningful onetime costs close to €350 million in addition to transaction fees. Furthermore, Ahold will return €1 billion to shareholders via a capital return and a reverse stock split. Also, we lack information on the possible need for asset disposals due to antitrust requirements.

Given that Delhaize's debt metrics are currently in the upper end of our "intermediate" financial risk category. However, we currently do not anticipate reassessing down the financial risk profile by one level to "significant."

We plan to resolve the CreditWatch when we receive additional details of the transaction and feedback from the concerned parties, including information on the likelihood of the transaction's closing, comments from employee representatives, and possible requirements from the regulatory authorities. This also involves a clear view on the combined group's future financial policy beyond the already stated envisaged 40%-50% dividend payout ratio.

We could raise the ratings by one notch if we assume that the transaction closes as anticipated in mid-2016, the combined group's business risk profile strengthens, and the financial risk profile does not deteriorate to a lower category.