Pacific Equity Partners

The two-year battle for control of New Zealand's biggest retailer looks set to move to a new arena - the Supreme Court - after the Court of Appeal blocked Woolworths and Foodstuffs from making bids. The decision led to The Warehouse's share price plunging to a nine-year low of $3.01 before rebounding to close down 60 cents on $3.22.

Woolworths, of Australia, and Foodstuffs, owner of New Zealand's two largest supermarket chains, issued statements expressing disappointment and saying they were reviewing their options. They have 20 working days to decide whether to appeal to the Supreme Court. Stephen Tindall, The Warehouse founder whose interests control 52 per cent of the shares, was unavailable for comment.

The Commerce Commission, which blocked the two chains from bidding for The Warehouse last June and then had its ruling overturned by the High Court in November, hailed the decision as a victory for consumers. Despite The Warehouse having only three stores with grocery offerings, it could not be ruled out as a significant supermarket competitor, commission chairwoman Paula Rebstock said. "The commission considered the presence of an innovative third party, such as The Warehouse, had the potential to increase the level of competition in this important market."

Most analysts, fund managers and competition lawyers BusinessDay spoke to said they thought Woolworths and Foodstuffs would go to the Supreme Court. "I'd say there's an 80 per cent-plus chance of that happening," Tower portfolio manager Paul Robertshawe said. Buddle Findlay competition partner Tony Dellow said: "Given they have already spent a lot of money on this, the incremental cost of going to the Supreme Court is pretty low."

What chance the companies have in the Supreme Court will be hard to gauge till the Court of Appeal issues its judgment, probably early next week. "A lot is going to depend on how the Court of Appeal has framed its answer today," Chapman Tripp partner Andy Nicholls said. The two main questions would be about the likely performance of The Warehouse Extra stores (offering groceries) in the next few years and how speculative the commission could be in predicting whether the stores would challenge the existing supermarket duopoly. "The concern everybody will have is the extent to which the Court of Appeal has endorsed the commission taking quite a speculative approach when faced with a new entrant. I imagine the supermarkets will be looking hard at that, and that would be the question they would consider [testing] in the Supreme Court."

If they are unsuccessful, there are several other ownership scenarios for The Warehouse. Mr Tindall, who made a $5.75-a-share bid in partnership with Pacific Equity Partners in 2006, may have another go at privatisation. "Price-wise the timing would be better now than it was then," Forsyth Barr analyst Guy Hallwright said. "But raising debt would be a lot more difficult."

Deutsche Bank analyst Kristan Walker said Mr Tindall and PEP could well make an offer for the 20 percent held by the two supermarket players. "It could be quite an opportune time for Stephen Tindall to come out with a privatisation plan and literally offer something on the table and take the stock off their hands – that's an extra 20 percent that sits alongside his 50-odd percent, and then it's not so much of stretch to get to the compulsory acquirement level."

Market commentator Arthur Lim said funding such a move would not be an issue, with Mr Tindall's stakeholding and PEP among one of the most cashed-up private-equity funds around. Nothing was stopping Mr Tindall going ahead with another privatisation bid, but without knowing whether Foodstuffs or Woolworths would appeal, such a move would be premature.

Rival bidders may also emerge, with Australian conglomerate Wesfarmers seen as the most likely. However, after buying supermarket chain Coles last year, Wesfarmers was busy trying to turn that business around, ING senior analyst Craig Brown said. "I think you've got the two most logical bidders on the table right now."

The Warehouse may decide to scrap its grocery strategy, though it is unclear whether that would clear the way for a Woolworths or Foodstuffs bid. "One thing that hasn't changed in all this is that the key player is Stephen Tindall," Mr Brown said.

The Warehouse founder Stephen Tindall may relaunch his bid to buy back the Red Sheds after a court decision to prevent the supermarkets from initiating takeover bids. The Court of Appeal's move to overturn the High Court judgment clearing suitors Woolworths and Foodstuffs to acquire the country's largest listed retailer means Tindall could resurrect plans to take back the business he started 26 years ago.

Tindall, who already controls 53 per cent of the company, announced plans on September 14, 2006 to reprivatise the group in order to pursue ambitious plans to spread super-stores offering a total retailing mix including groceries and general merchandising. Back then he and Australian private-equity firm Pacific Equity Partners were offering shareholders $5.75 a share - representing just a 12.5 per cent premium on the $5.11 closing price on the day. Weeks later he was trumped by Woolworths, which swooped on a 10.1 per cent stake at $6.50 a share.

But market experts say yesterday's development could see Tindall's grand plan back on the table.

Tindall and PEP managing director Tim Sims are understood to still hold each other in high regard, and the Red Sheds' share-price plunge yesterday to $3.22 means buying up the remaining 43 per cent becomes an entirely more attainable option. Based on his 2006 offer premium, Tindall may need to offer only $3.62 a share, given the state of the markets.

Deutsche Bank analyst Kristan Walker said Tindall and PEP could well make an offer for the 20 per cent held by the two supermarket players. "It could be quite an opportune time for Stephen Tindall to come out with a privatisation plan and literally offer something on the table and take the stock off their hands - that's an extra 20 per cent that sits alongside his 50-odd per cent, and then it's not so much of stretch to get to the compulsory acquirement level." But he cautioned that a private-equity investor would also be contemplating its exit strategy. With the two major players Foodstuffs and Woolworths unlikely candidates for a trade sale, the offer price now would have to factor in an attractive rate of return. "It comes down to price now."

Market commentator Arthur Lim said funding such a move would not be an issue, with Tindall's stakeholding and PEP among one of the most cashed-up private-equity funds around. "The ability to source funding might not be as readily accessible as before, but a 53 per cent shareholding accounts for a lot of underlying equity."

Lim said there was nothing stopping Tindall going ahead with another privatisation bid, but without knowing whether Foodstuffs or Woolworths would appeal such a move would be premature. "If Stephen makes his move he would have to be comfortable that they are not going to frustrate the process."

Head of research at ABN AMRO Craigs, Mark Lister, said the potential for Tindall to revive his privatisation plans was still there, but the prospect might be even more attractive in future. "The outlook for the domestic economy doesn't look like it's hit the bottom yet, so while it's at the low point, it still could go even lower," he said. "Retail's a sector that we're still all fairly cautious of, despite things having come back a fair way. There's still probably going to be a tough road for retailers in the short term."

With the two court decisions going either way, Lister believed there was a fair chance the suitors could appeal. "Either way, it sounds like that it's going to be reasonably drawn out, whether they do anything or not. "It still could be a little while before you get a final, final resolution on what ends up happening with The Warehouse," he said.

Deutsche's Walker, who had been favouring Woolworths to be the successful bidder, believed an appeal was likely. "I think it's going to be difficult, if not impossible, to replicate the same floor space that The Warehouse has in relation to Woolies wanting to be a major player in the general merchandise category in New Zealand. "It really does leave little options [for Woolworths] on the table."

Woolworths and Foodstuffs were reviewing their options after the decision.

Foodstuffs managing director Tony Carter said it was difficult to comment further or make a judgment on a potential application for leave to appeal, as they had yet to see the reasoning behind the decision. "There is a statutory 20-working-day period for an application for leave to appeal to the Supreme Court. We will be utilising this time to digest the Court of Appeal ruling before making any decisions."

The Commerce Commission, meanwhile, called the decision a victory for market competition and supermarket consumers.

THE STORY SO FAR
* The Warehouse has been in play since September 14, 2006, when founder Stephen Tindall revealed plans to privatise, offering $5.75 a share in partnership with Pacific Equity Partners.
* Later that month he was trumped by Woolworths, which bought a 10.1 per cent stake at $6.50 a share.
* In December 2006 Foodstuffs - already a 10 per cent owner - declared its intention to bid for The Warehouse. Foodstuffs and Woolworths applied for Commerce Commission approval to proceed.
* In late June last year the commission declined their applications.
* An appeal against that decision was heard in the Wellington High Court in October.
* On November 30 the High Court overturned the commission's decision.
* The commission applied for leave to appeal the decision and on January 31, the High Court granted it.
* The commission's appeal was heard in late April in the Appeal Court.
* On May 2, Woolworths and Foodstuffs agreed to a moratorium on bidding until 48 hours after the Court of Appeal issues its judgment.
* The Court of Appeal yesterday overturned the High Court decision, preventing Woolworths or Foodstuffs from launching takeover bids.

After 70 years the makers of a classic Kiwi biscuit are leaving Lower Hutt.  Griffin's Foods Ltd announced today it would close its Lower Hutt factory – at a loss of 200 jobs – relocating production to its newly redeveloped Papakura site.

Chief executive Ron Vela said much of the factory's equipment was nearing its end date, and the company could not justify the investment needed to bring it up to scratch.  Griffin's was committed to retaining its manufacturing base in New Zealand but could not do so without rationalisation of its operations, Mr Vela said.

The company was established in Nelson by John Griffin in the 1860s.  The Lower Hutt factory was opened in 1938 and the Papakura factory in 1967.  The company now has nearly 1000 employees – 228 in Lower Hutt – and operates four manufacturing sites in New Zealand.

Pacific Equity Partners bought Griffin's in June last year, and since then has invested more than $130 million into the business, Mr Vela said.

Griffin's turnover is in excess of $300 million and it produces more than 350 products, including toffee pops, gingernuts, snax, meal mates, cameo cremes, mallowpuffs, krispies and wine biscuits.

The Lower Hutt site is expected to close in October 2008.  Mr Vela said Griffin's was the only major biscuit supplier in New Zealand that produced all its company branded product lines locally.  Competition from imported products continued to be fierce and the company wanted to counter this competition by producing top quality products for the New Zealand market, and growing offshore market opportunities, he said.  Mr Vela said the decision to close the Lower Hutt plant was extremely difficult, given the potential impact on staff.  There would be a number of positions available for staff wishing to relocate to Auckland, and "generous" redundancy packages would be available, he said.

The Service and Food Workers Union (SFWU) said its 200 members at the site were "extremely disappointed" the decision had been made without consultation.  SFWU national secretary John Ryall said the shock was compounded by the fact that in 2002 the company's former owners worked on a study with the union and the Lower Hutt City Council that concluded the plant should stay open and was a viable business.

"We think the company is under pressure from their investors to squeeze a bigger return from their investment," Mr Ryall said.  "Private equity companies like PEP have a long, established history of breaking apart investments like food manufacturers and selling the parts off in exchange for larger shareholder returns.  "This closure announcement comes hot on the heels of the announcement to close Avondale's Cadbury factory.  "We have some very real concerns about the future of food manufacturing in New Zealand." Mr Ryall said.

If Warehouse shareholders are bracing themselves for this week's Commerce Commission ruling on a potential $2 billion takeover, their anxiety will be nothing compared to the nerves at Woolworths and Foodstuffs.

The commission has extended its deadline twice, shattering any confidence that either supermarket group would be cleared to buy the Red Sheds.  As the tension mounts, speculation over the outcome has grown more feverish.

"If the commission says yes to both there's not going to be a competition," said one market source. "Foodstuffs is not going to buy the company. They're not in a position to bid for it.

"It'll take $6.50 a share, maybe $7 to get (founder Stephen Tindall) out and private equity won't get up to those levels. There will be no tension in the process to get it higher."

Under this scenario, he said, Foodstuffs, owner of New World and Pak'nSave, saw the regulator as a potential ally in beating Woolworths to a deal. "Foodstuffs went to the commission for full approval to force the issue and run the bet that Woolworths might be turned down.

"If it was turned down the private equity deal is back on the table -Foodstuffs would come in for 20% and you'd see Stephen and (private equity firm) Pacific Equity Partners sharing the rest.".  Another source described that scenario as "gobbledegook".

Commerce Commission approval was an unavoidable requirement for both potential buyers, he said.

"I think people totally underestimated the issues. Even a non-grocery Warehouse store has a whole heap of products you can buy in a supermarket. People are only now starting to realise the risk of the Commerce Commission turning it down."

Warehouse shares have fallen significantly in the last month, down from $7.32 to $6.68 on Friday, reflecting less certainty of a competitive deal going ahead.

The ownership shake-up of the New Zealand retail sector could become a transtasman quake if the $22 billion Pacific Equity Partners (PEP) backed takeover bid for Australian retail giant Coles succeeds, industry experts say.

The Coles bid - led by Perth-based retailer Wesfarmers - is the largest takeover play in Australasian history.

The prospect of the new Coles owners having ties to PEP has sparked speculation about the chances of another party making a New Zealand supermarket play by getting involved in the bidding war for The Warehouse.

The price being offered for the Australian retailer also helped rekindle interest in The Warehouse shares. Yesterday they rose 12c to close at $6.89.

Based on the kind of PE (price to earnings) multiples Coles is now trading on, it was conceivable The Warehouse could be sold for well in excess of $8 a share, said one industry source.

Private equity firm PEP is backing the Wesfarmers bid for Coles in a consortium with Macquarie Bank and Permira.

PEP is also thought to be involved with Foodstuffs in its bid for The Warehouse - still awaiting clearance from the Commerce Commission.

PEP involvement in both deals would give them options in New Zealand either through a Foodstuffs bid - or acting independently, industry sources said yesterday.

Australian retailer Woolworths is also awaiting clearance and is poised to pounce on the Red Sheds.

Forsyth Barr retail analyst Guy Hallwright said the change opened up the possibility of new players in The Warehouse saga.  But it was too early to say whether Coles would change its position of limited interest in New Zealand.

"What would make Woolworths very nervous is any suggestion that Coles might get backdoor entry to the New Zealand market which it shares with Foodstuffs," he said.

Wesfarmers has paid A$16.47 per share for 11.3 per cent of Coles - a price that values the takeover at A$19.7 billion.

The price is up 8 per cent on the A$16 billion offered by private equity firm Kohlberg Kravis, Roberts & Co - which was rejected by Coles in October. KKR said yesterday it would still consider a further bid for Coles.

Coles is a retail giant in Australia but has limited interests in New Zealand apart from its 14 K-Mart stores - an investment considered "too small to be profitable and too big to easily shut down".  But the Wesfarmers takeover changes the dynamics of the Australian supermarket sector dominated by Coles and Woolworths.

And it also has implications for general goods.  Wesfarmers has 38 Bunnings and Benchmark hardware stores in New Zealand. Bunnings bought into the New Zealand market in 2001 but like other big Australasian retailers - including K-Mart - has faced problems obtaining sites to expand its big retail outlets.

For that reason The Warehouse would offer the one-off opportunity for general goods that makes the purchase appealing to Woolworths.  Both K-Mart and Bunnings have seen expansion plans stalled and would benefit from synergies of joint buying and having a bigger retail footprint.

If successful, Wesfarmers would own about 3000 supermarkets and discount stores.  One broker suggested there were now expectations that Woolworths would speed up its bidding process. 

It had been understood that Stephen Tindall instructed both Woolworths and Foodstuffs to seek clearance so that any sale decision he makes can be instantly implemented.  However amid expectations that the Wesfarmers bid could hasten The Warehouse play, a Tindall source said that the requirement was not in writing and not set in stone.

Hallwright said that PEP was viewed as a possible partner with Foodstuffs' bid because as a co-operative Foodstuffs had limited prospects for such a play compared to Woolworths. "The thinking has been that maybe they can get together, maybe with Tindall," he said.

Warehouse chief executive Ian Morrice said last month the company would consider buying Coles assets in Australia from any break-up. Clothing chain Target and Officeworks were suggested as options.

Sir Ron Brierly's Guinness Peat Group is in for a multimillion-dollar windfall as a result of the takeover activity surrounding Australian retail giant Coles.

One of GPG's investments is a 16 per cent stake in Premier Investments, which announced agreements yesterday to sell its 5.9 per cent stake in Coles for $A16.47 ($NZ18.67) a share to Perth-based conglomerate Wesfarmers. The sale would reap Premier more than $A1.14 billion.

News of the deal caused the Premier share price to soar, increasing the value of GPG's holding in the company by $A14 million ($NZ15.8 million) yesterday alone.

Since the end of GPG's 2006 financial year its investment in Premier has increased in value by more than A$40 million.

Premier has not given any indication what it will do with the money, but GPG would stand to benefit directly if it opted to return some of the proceeds to shareholders. GPG shares rose four cents to $2.31 yesterday.

Meanwhile, the involvement in the Coles takeover plans of Australian private equity group Pacific Equity Partners has potential ramifications on this side of the Tasman, given that PEP is also interested in being part of any takeover of The Warehouse. PEP is believed to be keen to team up with Foodstuffs to buy The Warehouse.

The Warehouse has indicated that it might be interested in some parts of the Coles business if they are available for sale, so some shuffling of trans-Tasman assets is possible if PEP becomes involved with both Coles and The Warehouse.

In New Zealand, Coles operates 11 K-mart discount stores in competition to The Warehouse.

Companies Office records show that Coles Group New Zealand Holdings made an after tax profit of nearly $14 million for the year to July 2006, compared with under $10 million the year before.

However, sales dropped by about $5 million to $176 million. The Kiwi K-mart business has often been rumoured in the past to be available for sale.

Wesfarmers, the senior figure in the potential takeover, also has substantial operations in New Zealand.

It runs about 40 hardware stores under the Bunnings and Benchmark labels, while it also has the Lumley insurance business, which has 10 offices in New Zealand.

Australian retail giant Coles could become the centre of a bidding war after a consortium led by Perth-based Wesfarmers executed a surprise raid and snapped up 11.3 per cent of the retailer.  The consortium is also believed to include Macquarie and the private equity firms Pacific Equity Partners and Permira.

Much of the stake Wesfarmers secured came from major Coles shareholder Premier Investments. Premier, controlled by former Coles chairman Solomon Lew and chaired by Sir Ron Brierley, confirmed it had agreed to sell its 5.9 per cent stake in Coles for A$16.47 a share.

The price was a 2.2 per cent premium on Coles' Monday closing price, pushing the company's value up to just under A$20 billion (NZ$22.67 billion).

The Australian Securities Exchange placed Coles and Wesfarmers in trading halts on Monday, while they met for talks.

Wesfarmers said it would make an announcement to the market after those discussions.  Wesfarmers is one of Australia's biggest public companies. Its interests range from coalmining and insurance, to the home improvement chain Bunnings.

As well as its Australian supermarkets, Coles owns the stationery and office supply chain Officeworks, and the discount retail chains Target and Kmart.

Wesfarmers has reportedly fancied Coles' supply chain Officeworks, but may also be considering a full takeover, enabling it to merge Bunnings with Coles' supermarkets.

Potential buyers have been circling the troubled supermarket chain since late last year.  In October, Coles rejected as too low an A$15.25-a-share offer from a consortium led by Kohlberg Kravis Roberts & Co.  But Coles then put itself on the market in February after downgrading its profit forecast.  KKR returned as part of a consortium understood to include CVC Asia Pacific, Texas Pacific Group, the Carlyle Group and Blackstone Group.  Other interested parties reported to be running the ruler over Coles are the British retailer Tesco, the French retailing group Carrefour and the American chain Wal-Mart.

Even if Wesfarmers decided not to proceed with a full takeover bid, its 11.3 per cent holding would prove a stumbling block for other bidders.

"They have got a seat on the table and no one can have 100 per cent control of Coles without Wesfarmers agreeing to it now," said Steve Robinson, a portfolio manager with Alleron Investment Management, which owns Coles shares.

A shake-up among New Zealand book sellers is looming with the Paper Plus chain poised to launch itself as a serious player and industry veteran Whitcoulls tries to become a trans-Tasman Amazon.com.

The A&R Whitcoulls group, owned by private equity investor, Pacific Equity Partners (PEP) since 2004, is expected to snap up the cream of the Borders stores that were put up for sale last week by their US owners.

Whitcoulls is continuing to expand as it prepares for a share float scheduled for March next year.

Whitcoulls group managing director, Ian Draper, told the Herald on Sunday last week that the company would be looking at cherry-picking some of the better Borders stores.

The American book retailer sent a ripple through the global book industry last week when it announced it was selling its shops outside America.

The bad times might come to New Zealand as they have in the US, says retail analyst Tim Morris from Coriolis Research.

"The market here could be doing very well now, but there might be clouds on the horizon because all of these industries have got a bit going on globally," he says.

Borders has done good business in the buoyant New Zealand book market, achieving an annual turnover of $17 million, which represents almost 2 per cent of the New Zealand news-stand and bookstore retail book market of $935 million. It opened a new store on Thursday at Sylvia Park and is on track to open another in Albany in October. Borders opened its first New Zealand store in Auckland's Queen St in 1999.

Borders regional manager in New Zealand, Justin Barratt, says he is sure buyers would want all the Borders stores and to keep the brand in New Zealand. The American company has franchise operations in Asia which could be used here too, he said.

According to Statistics New Zealand, New Zealand households spend $16-$17 a week on publications and stationery. In a recent survey, Kiwis voted reading as their favourite activity, said Booksellers New Zealand, the association which represents both book retailers and book publishers.

Meanwhile the major players in the book retailing market, Whitcoulls and Paper Plus, with 40 per cent and 30 per cent market shares respectively, believe there is room for more growth.

According to Paper Plus figures, the publications and stationery market, including office products, is worth around $1.5 billion a year.

Rob Smith, the managing director at Paper Plus, who came in 18 months ago from Warehouse Stationery to change the direction of the company, says Paper Plus will be raising the profile of books and reading in the coming months.

The 200-store franchise announced to its suppliers a week ago that it would be stepping up its book offering, and had appointed Kerre Woodham as its media spokesperson.

The retailer's target market will be women aged 29 and over who relate well to Woodham, says Smith.

"Kerre's choices will be like Richard & Judy's [popular chat-show hosts] picks in the UK. Richard and Judy grew the market. It is not about selling the latest new release," says Smith. "It's about a higher exposure of books."

The new-look Paper Plus with greater emphasis on books will be unveiled in its Sylvia Park store opening in July.

"By Christmas 2007, this business is going to look completely different to how it looks now," says Smith.

Stationery will be another area to be ramped up.

"Stationery is the last Aladdin's cave," says Smith. "Individual stationery is part of the lifestyle choices we are looking at."

Whitcoulls' Ian Draper, confirms the company is working to a schedule that will mean an initial public offering (IPO) in March next year.

PEP may well hold a stake in the business for a period after the public listing, which he says would be a good thing for Whitcoulls.

"There has been a significant investment in store fit-outs, we have not lacked that kind of investment."

Whitcoulls is the most acquisitive of the book retailers in New Zealand.

The group opened 22 new stores in Australia last year under A & R (Angus & Robertson) last year.

With 80 Whitcoulls stores in New Zealand, plus eight airport stores and 190 company owned/franchised stores in Australia under the Angus & Robertson brand, the chain will continue to grow, says Draper.

In the next couple of months, the company will relaunch the Whitcoulls website, where it will sell not only books but also stationery, DVDs and games, setting itself squarely against online competitor, amazon.com.

"We want to be the Amazon of Australasia," says Draper. "The amount of money invested is significant enough to back that."

The company has identified another key area of growth. The retailer's store at Botany Town Centre has a floor dedicated to children interacting with toys and books.

Draper says 70 per cent of book sales were in children's books under $20, followed by lifestyle books.

More retailers are jumping on the book bandwagon with supermarkets and The Warehouse also selling best-selling titles.

The number of internet book sales is still relatively small in New Zealand. Whitcoulls and Paper Plus both sell online. Real Groovy has one of the more mature online book selling businesses and runs Paper Plus's online book business.

Real Groovy book manager, Doris Mousdale says to have an effective online business it has to be regularly maintained.

Mousdale will go to a lot of trouble tracking down a book and may suggest a second-hand copy if that is all that is available.

"We would be profitable if there were another 2 million people in the country," says Mousdale dryly.

Competition for books is being under-estimated, she says.

A $36.99 book purchase competes with an outfit at Glassons or a concert ticket to the Red Hot Chili Peppers.

Independent book stores, meanwhile, are holding their own in the market, according to Booksellers NZ. Dymocks, the Australian retailer which has five stores so far in New Zealand and sees itself as a "large independent", says it is "very happy" with its trading, including that of its latest new store in Queensgate, Lower Hutt.

"I would say that there is more potential here. There are areas where we believe the market is under-served and we are looking to fill these gaps," says Dymocks NZ general manager, Perry Lennon.

"We concentrate 95 per cent on books, our staff are totally book orientated," he says.

"A book is still a very good way of presenting a point of view."

One of the key challenges for book retailers in coming years is the growing trend for readers to digitally download their books.

Michael Moynahan, managing director of Random House and chairman of the Book Publishers Association of New Zealand, said he thinks people will continue to read books but the question is what form it will be delivered in.

"As publishers we need to find different ways of delivering them to people providing authors are recompensed and the public gets what they want," he says.

The publishing sector in New Zealand grew at a rate of 31 per cent last year to $255 million compared with 36 per cent growth in 2005.

"What we are finding in the market is there are multiple opportunities for more than one distribution channel for more than one type of reader," says Moynahan.

He thinks a mix of readers is keeping the market strong. "It's a combination of strong book readers who are buying across a broad range of books, over a variety of genres."

Books buying is viewed by the book sector as a lifestyle choice, up against some stiff competition.

"Why sit down and read a book when you can pick something up that is cordless and shoot?" asks Smith. "We are seeing a swing from parents, saying we've got to get them back into reading."

Linda Henderson, chief executive of Booksellers NZ says a recent survey showed reading is New Zealand's favourite activity.

"We are competing with other leisure operations, with Playstation 3s selling for $1200. You have to sell a lot of books to match that. Booksellers have to be competitive, and always be a step ahead."

The Commerce Commission is expected to further defer making a decision on whether either Foodstuffs or Woolworths could take over the Warehouse.

That move might lead one of the supermarket giants to take pre-emptive bidding action.

Warehouse shares rose sharply yesterday, up 20c to 681, with almost 700,000 shares crossed. Brisk volumes of shares have changed hands recently.

A commission decision is due on Friday, but market sources indicated yesterday that all the signs were the commission would seek more time, possibly another month. The commission has been studying the issue since before Christmas.

It is believed within the market that a further delay in a decision could see one of the supermarket giants break cover and launch a bid anyway – possibly at a price as high as 775c a share.

Neither of the supermarket giants are bound to wait for commission approval before launching a bid, but bidding without approval would carry some risks. However, moving first could give one the upper hand.

A price of 775c a share would value the Warehouse at around $2.4 billion. Foodstuffs and Woolworths each hold 10 per cent stakes in the Warehouse.

Founder Stephen Tindall will decide the fate of the company as he controls just under 52%. Both of the supermarket firms could lift their stakes to 19.9% without having to make a full bid.

Foodstuffs showed how serious it is by spending $1.5 million buying more shares at 679c each last week to top up its stake to 10%. The stake had eased below 10% because of shares issued to the Warehouse's staff share option scheme.

It is expected that Foodstuffs would bid in tandem with Pacific Equity Partners (PEP), and possibly with Tindall as well. PEP originally planned to partner Tindall in a bid for the Warehouse last year but this was torpedoed by the intervention of the supermarkets.

Having just failed this week in a bid for Telecom's Yellow Pages directories business, PEP would be in a strong financial position to bid for another significant New Zealand asset. Already PEP owns Griffins, Tegel, Whitcoulls and Independent Liquor in this country.

Woolworths would be expected to bid on its own.

Competition lawyers spoken to yesterday still expected that the supermarket companies would get commission approval to buy the Warehouse. "But clearly it taking so long is a bad sign, rather than a good sign for the supermarket companies," Buddle Findlay competition law partner Tony Dallow said.

Theoretically, either of the supermarket companies could go ahead and buy the Warehouse without commission approval but this would leave the commission open to investigate the deal and potentially bring a prosecution.

It has to be the perfect takeover situation. Two big players want The Warehouse - and neither wants the other to get it. And founder Stephen Tindall, and a private equity fund, might still want it.

Hindsight is a wonderful thing. Few could have imagined the country's biggest discount retailer could have attracted this much interest after being out of favour with investors for much of this decade.

The shares traded as low as $3.46 last year and $3.04 in 2005 as the group struggled with what the market judged to be an ill-conceived bid to establish itself in Australia, a venture subsequently sold after running up heavy losses.

The performance of the New Zealand stores also faltered. This led to the appointment of a new chief executive and a revamp of the Red Sheds with a more upmarket sales strategy, Price Rollback, and the gradual introduction of new Mega Stores, which include grocery and pharmaceutical sections.

This process is showing promise, though normally it would take time and sustained earnings improvements to convince the market the group was in a strong recovery mode.

However, these are not ordinary times for the company.

The share price has rocketed since Tindall teamed up to privatise the company with private equity fund Pacific Equity Partners (PEP), which has substantial interests in the food business in this country.

This was torpedoed when co-op food group Foodstuffs gained a 10% stake, seen as a defensive move to forestall The Warehouse developing into a major competitor in food.

Woolworths then responded - presumably for the same reasons - and it too has 10%. Both Woolworths and Foodstuffs are seeking regulatory approval to buy the company.

The key is Tindall with his blocking 51% stake. He has expressed a high regard for PEP, leading to speculation he may be prepared to do a three-way deal with Foodstuffs to again try to privatise the company.

Privatisation - especially with relatively passive shareholders who won't be troubled by day to day fluctuations in the company's share price (like existing shareholders) - would be an attractive option for Tindall, and allow the company to grow by adopting long-term strategies. However, with Foodstuffs as a partner he might have to retreat on promoting the grocery side of the business.

Foodstuffs might have other ideas. It surprisingly took part in a profile-raising exercise alongside other important New Zealand companies (including Fonterra) with key figures in the Australian investment world earlier this month in Sydney, when it disclosed its inner workings at the annual ABN Amro New Zealand Day in Sydney. As a financially strong independent co-op, Foodstuffs hasn't felt the need to do this before, raising speculation that something could be up.

In its first half, The Warehouse reported a tax paid profit of $61 million. This was broadly in line with previous guidance issued by the company, and 3% higher than the $59.2m for the same period of the previous financial year, not counting the one-off loss from the sale of Warehouse Australia. First NZ Capital said it was a creditable result in light of the challenging retail period, especially for clothing where sales were affected by poor summer weather. It said the new sales initiatives implemented by management were delivering results with increases in same-store sales and a slight increase in operating margins.

The company reported a sales increase of 6.6% in same-store sales in February, but expected retail conditions to remain challenging for the rest of this financial year. Management said it was comfortable with analysts' consensus forecasts of a $96m profit this year.

First NZ Capital said its stand-alone valuation for the stock at $5 was meaningless with the prospect of corporate takeover activity. "In our view the current share price reflects an expectation that Mr Tindall accepts an offer from Woolworths for the company." However, First NZ Capital said that if Tindall were to retain the status quo, or form a joint venture with Foodstuffs and/or private equity, it would expect a meaningful share price retraction. It rates the stock an under-perform with a target price of $5.75.

Goldman Sachs JB Were does not issue a recommendation on the stock, but values it at $4.61. ABN Amro rates it a hold with a target price of $6.50. Wellington brokerage Waddell Johnston McCarthy also recommends it as a hold, valuing at $4.56.