The Warehouse is coming under pressure to axe its fresh food
grocery offering in order to let shareholders get a higher price for
their shares through a takeover offer. The recent move by The Warehouse into fresh food retailing
at sites in Whangarei and Auckland is believed to be the reason why the
Commerce Commission last week blocked either Woolworths or Foodstuffs
from making a takeover bid.
The Warehouse Extra hypermarket format was launched after a lot of planning. But recent evidence suggests the move into supermarket retailing is not faring well. The argument in the marketplace is that if the fresh food offering was
dropped both Woolworths or Foodstuffs would be able to bid, with the
result that shareholders could expect a much higher takeover offer.
Brook Asset Management chairman Simon Botherway on Friday wrote to the board seeking a strategic and capital review. "(The Warehouse is) worth more to alternative shareholders than to current shareholders," he told The Sunday Star-Times. "I've made that clear to the board and asked them to carry out a review of the grocery strategy."
First NZ Capital analyst Sarndra Urlich, in a report yesterday,
questioned whether The Warehouse should curtail the grocery strategy
enough to enable Woolworths or Foodstuffs to get clearance to buy it. "Why run the risk of ceding any valuation upside to private equity," she said.
A private equity buyer of The Warehouse could simply halt the fresh
food grocery expansion itself and then sell the business on later to a
trade buyer, she said. "In our opinion, the valuation upside
from ending the hypermarket strategy that is the increased chance of a
favourable regulatory outcome for a trade buyer is significantly higher
than continuing with it. The hypermarket strategy is flawed
in the New Zealand context and could potentially suppress earnings,
assuming a meaningful rollout of this format," Ms Urlich said.
The Warehouse chairman Keith Smith said yesterday that the Warehouse
Extra strategy was continuing as planned "and nothing has changed". Mr Botherway's ideas would be tabled before the board. "But we have a number of stakeholders and they are not just the
shareholders - and we will consider all of those stakeholders."
The Warehouse's shares traded as high as $7.32 in April when most
people in the marketplace believed that both Foodstuffs and Woolworths
would be given approval to make bids - setting up a huge battle that
would be potentially lucrative for the existing shareholders. But after Friday's verdict from the commission, the share price sagged
as much as 9.2 per cent. It recovered a little yesterday, closing up 2
cents at $6.07. Both supermarket companies are expected to appeal against the commission's decision, which could take six months at least.
