Koninklijke Ahold Delhaize N.V. – Annual report – 31 December 2017
34 Commitments and contingencies (extract)
Contingent liabilities (extract)
Guarantees to third parties issued by Ahold Delhaize can be summarized as follows:
The amounts included in the table above are the maximum undiscounted amounts the Group could be forced to settle under the arrangement for the full guaranteed amount, if that amount is claimed by the counterparty to the guarantee. As part of the divestment of U.S. Foodservice in 2007, Ahold Delhaize received an irrevocable standby letter of credit for $216 million (€163 million), which was reduced to $54 million (€45 million) as of December 31, 2017 (2016: $64 million (€60 million)).
Ahold Delhaize is contingently liable for leases that have been assigned and / or transferred to third parties in connection with facility closings and disposals. Ahold Delhaize could be required to assume the financial obligations under these leases, if any of the third parties are unable to fulfill their lease obligations. The lease guarantees are based on the nominal value of future minimum lease payments of the relevant leases, which extend through 2040. The amounts of the lease guarantees exclude the cost of common area maintenance and real estate taxes; such amounts may vary in time, per region, and per property. Of the €705 million in the undiscounted lease guarantees, €145 million relates to the BI-LO / Bruno’s divestment, €156 million to the Sweetbay, Harveys, and Reid’s divestment, €113 million to the Bottom Dollar Food divestment and €112 million to the Tops divestment. On a discounted basis, the lease guarantees amount to €617 million and €786 million as of December 31, 2017, and January 1, 2017, respectively.
BI-LO / Bruno’s divestment
In 2005, Ahold Delhaize divested its U.S. retail subsidiaries BI-LO and Bruno’s. On February 5, 2009, and March 23, 2009, Bruno’s Supermarkets, LLC and BI-LO, LLC, respectively, filed for protection under Chapter 11 of the U.S. Bankruptcy Code (the filings). As a result of the filings, Ahold Delhaize has made an assessment of its potential obligations under the lease guarantees based upon the remaining initial term of each lease, an assessment of the possibility that Ahold Delhaize would have to pay under a guarantee and any potential remedies that Ahold Delhaize may have to limit future lease payments. Consequently, in 2009, Ahold Delhaize recognized provisions of €109 million and related tax benefit offsets of €47 million within results on divestments.
On May 12, 2010, the reorganized BI-LO exited bankruptcy protection and BI-LO assumed 149 operating locations that are guaranteed by Ahold Delhaize. During the BI-LO bankruptcy, BI-LO rejected a total of 16 leases that are guaranteed by Ahold Delhaize and Ahold Delhaize also took assignment of 12 other BI-LO leases with Ahold Delhaize guarantees. Based on the foregoing developments, Ahold Delhaize recognized a reduction of €23 million in its provision, after tax, within results on divestments in the first half of 2010. Since the end of the second quarter of 2010, Ahold Delhaize has entered into settlements with a number of landlords relating to leases of former BI-LO or Bruno’s stores that are guaranteed by Ahold Delhaize.
At the end of 2017, the remaining provision relating to BI-LO and Bruno’s was €11 million (2016: €15 million) with a related tax benefit offset of €3 million (2016: €6 million). This amount represents Ahold Delhaize’s best estimate of the discounted aggregate amount of the remaining lease obligations and associated charges, net of known mitigation offsets, which could result in cash outflows for Ahold Delhaize under the various lease guarantees. Ahold Delhaize continues to monitor any developments and pursue its mitigation efforts with respect to these lease guarantee liabilities.
Sweetbay, Harveys and Reid’s and Bottom Dollar Food divestments
As part of Ahold Delhaize’s divestment of Sweetbay, Harveys and Reid’s in 2014 and Bottom Dollar Food in 2015, Ahold Delhaize had provided guarantees for a number of existing operating and finance lease contracts, which extend through 2037. Ahold Delhaize has made an assessment of its potential obligations under lease guarantees considering the remaining term of each lease, re-let potential of the property if the acquirer were to default on the lease, and the credit position of the counterparty. Ahold Delhaize recognized a liability of €20 million, which represents the estimated fair value of the lease guarantees.
Ahold Delhaize has provided corporate guarantees to certain suppliers of its franchisees or non-consolidated entities. Ahold Delhaize would be required to perform under the guarantee, if the franchisee or non-consolidated entity failed to meet its financial obligations, as described in the guarantee. Buyback guarantees relate to Ahold Delhaize’s commitment to repurchase stores or inventory from certain franchisees at predetermined prices. The buyback guarantees reflect the maximum committed repurchase value under the guarantees. The last of the corporate and buyback guarantees expire in 2022.
Representations and warranties as part of the divestment of Ahold Delhaize’s operations
Ahold Delhaize has provided, in the relevant sales agreements, customary representations and warranties including, but not limited to, completeness of books and records, title to assets, schedule of material contracts and arrangements, litigation, permits, labor matters, and employee benefits and taxes. These representations and warranties will generally terminate, depending on their specific features, a number of years after the date of the relevant transaction completion date.
The most significant divestments of operations are described below. In addition, specific, limited representations and warranties exist for a number of Ahold Delhaize’s smaller divestments. The aggregate impact of claims, if any, under such representations and warranties is not expected to be material.
As part of the divestment of Disco S.A. (Disco) in 2004, Ahold Delhaize is required to indemnify the buyers of Disco S.A. (Disco) and Disco for certain claims made by alleged creditors of certain Uruguayan and other banks, with a contingent liability cap of €11 million. Ahold Delhaize assesses its likelihood to be liable up to the amount of the contingent liability cap to be remote. The cap does not include Ahold Delhaize’s indemnification obligation relating to the Uruguayan litigation described in the Legal proceedings section of this Note. Ahold Delhaize’s indemnification obligation relating to this litigation is not capped at a certain amount nor restricted to a certain time period.
In 1992, Stop & Shop spun off Bradlees Stores, Inc. (Bradlees) as a public company (the Bradlees Spin-off). In connection with the Bradlees Spin-off, Stop & Shop assigned to Bradlees certain commercial real property leases. Pursuant to a 1995 reorganization of Bradlees and a subsequent wind-down and liquidation of Bradlees following a bankruptcy protection filing in 2000 (collectively, the Bradlees Bankruptcies), a number of such real property leases were assumed and assigned to third parties. Pursuant to applicable law, Stop & Shop may be contingently liable to landlords under certain of the leases assigned in connection with the Bradlees Spin-off and subsequently assumed and assigned to third parties in connection with the Bradlees Bankruptcies.
BI-LO / Bruno’s divestment
In connection with the divestment of BI-LO and Bruno’s in 2005, Ahold Delhaize may be contingently liable to landlords under guarantees of some 200 BI-LO or Bruno’s operating or finance leases that existed at the time of the divestment, in the event of a future default by the tenant under such leases. As a result of the bankruptcy filings by BI-LO and Bruno’s during 2009, a provision was recognized in 2009. BI-LO exited bankruptcy in May 2010 and the Company has re-evaluated its estimate of liability. For more information, refer to the Guarantees section of this Note.
Tops Markets, LLC divestment
In connection with the divestment of Tops in 2007, Ahold Delhaize has certain post-closing indemnification obligations under the sale agreement that the Company believes are customary for transactions of this nature. Ahold Delhaize retained liabilities as part of the divestment, including contingent liability for 45 leases that carry Ahold Delhaize guarantees. Additionally, Ahold Delhaize retained liabilities related to stores previously divested, including guarantees on five Tops stores in eastern New York state, as well as liabilities related to the Tops convenience stores and the stores in northeast Ohio as outlined under Tops convenience stores.
Tops convenience stores: Wilson Farms and Sugarcreek
Pursuant to applicable law, Tops may be contingently liable to landlords under 186 leases assigned in connection with the divestment of the Tops’ Wilson Farms and Sugarcreek convenience stores in 2005, in the event of a future default by the tenant under such leases. Ahold Delhaize may be contingently liable to landlords under the guarantees of 77 of these leases in the same event.
Tops northeast Ohio stores
Tops closed all of its locations in northeast Ohio prior to year-end 2006. As of December 31, 2017, 33 of the total 55 closed locations in northeast Ohio have been divested or are now subleased or partially subleased. An additional 19 leases have been terminated. Three stores continue to be marketed. In connection with the store divestments, Tops and Ahold Delhaize have certain post-closing indemnification obligations under the sale agreements, which Ahold Delhaize believes are customary for transactions of this nature. Pursuant to applicable law, Ahold Delhaize may be contingently liable to landlords under guarantees of 14 of such leases in the event of a future default by the tenant under such leases. If Ahold Delhaize is able to assign the leases for the remaining northeast Ohio stores, then pursuant to applicable law, Ahold Delhaize also may be contingently liable to landlords under guarantees of certain of such remaining leases in the event of a future default by the tenant under such leases.
Sweetbay, Harveys and Reid’s and Bottom Dollar Food divestments
As part of Ahold Delhaize’s divestment of Sweetbay, Harveys and Reid’s in 2014 and Bottom Dollar Food in 2015, Ahold Delhaize has provided guarantees for a number of existing operating and finance lease contracts, which extend through 2037. As of December 31, 2017, Ahold Delhaize may be contingently liable for 98 leases as part of the Sweetbay, Harveys and Reid’s divestment and 37 leases as part of the Bottom Dollar Food divestment. In the event of a future default of the buyer, Ahold Delhaize’s obligations under the terms of the contracts to the landlords will be triggered. The leases guaranteed are in respect of two specific buyers. The Sweetbay, Harveys and Reid’s stores were sold to BI-LO and the Bottom Dollar Food stores were sold to Aldi. For more information, refer to the Guarantees section of this Note.
Tom & Co divestment
In 2016, Ahold Delhaize divested the pet specialist shop chain Tom & Co. As part of the transaction, Ahold Delhaize granted indemnities to the purchaser of all divested stores, which Ahold Delhaize believes are customary for transactions of this nature.
Divestment of remedy stores in Belgium
In March 2016, Ahold Delhaize received approval from the Belgian Competition Authority (BCA) for the merger between Ahold and Delhaize. The approval was conditional upon the divestment of a limited number of stores and projects in Belgium to address competition concerns raised by BCA. In 2017, Ahold Delhaize completed these divestments, which Ahold Delhaize believes took place subject to terms and conditions customary for transactions of this nature.
Divestment of remedy stores in the U.S.
In July 2016, as a condition of receiving regulatory clearance for their merger from the United States Federal Trade Commission (FTC), Ahold and Delhaize entered into a consent agreement (“Consent Agreement”) with the FTC that required Ahold and Delhaize to divest stores in seven states in order to prevent the merger from being anti-competitive. In connection with the Consent Agreement, Ahold and Delhaize subsidiaries entered into agreements with seven buyers to sell a total of 86 stores (81 of these stores are required divestitures under the Consent Agreement), including 73 leased stores and 13 owned stores. As of July 19, 2017, Ahold Delhaize had completed all of the required divestitures. With respect to the 73 leased stores, the store sales involved the applicable Ahold Delhaize subsidiary assigning each store lease to the buyer. Pursuant to applicable law, the Ahold Delhaize subsidiary which assigned each of the 73 leases may be contingently liable to the landlord under such lease, in the event of a future default by the tenant under such lease. Any other Ahold Delhaize subsidiary that previously held the tenant’s interest in such lease may also be liable in such event. In addition, Ahold Delhaize or Ahold Delhaize subsidiaries also may be contingently liable to landlords under the guarantees of 13 of the 73 leases in the same event. See also Note 5 to the consolidated financial statements.
Because Ahold Delhaize operates in a number of countries, its income is subject to taxation in differing jurisdictions and at differing tax rates. Significant judgment is required in determining the consolidated income tax position. We seek to organize our affairs in a sustainable manner, taking into account the applicable regulations of the jurisdictions in which we operate. As a result of Ahold Delhaize’s multi-jurisdictional operations, it is exposed to a number of different tax risks including, but not limited to, changes in tax laws or interpretations of such tax laws. The authorities in the jurisdictions where Ahold Delhaize operates may review the Company’s tax returns and may disagree with the positions taken in those returns. While the ultimate outcome of such reviews is not certain, Ahold Delhaize has considered the merits of its filing positions in its overall evaluation of potential tax liabilities and believes it has adequate liabilities recorded in its consolidated financial statements for exposures on these matters. Based on its evaluation of the potential tax liabilities and the merits of Ahold Delhaize’s filing positions, it is unlikely that potential tax exposures over and above the amounts currently recorded as liabilities in its consolidated financial statements will be material to its financial condition or future results of operations.