Published: 2 March 2005
The Progressive Enterprises Ltd supermarket group in New Zealand looks like becoming a separate Australia-listed entity no matter who wins the Metcash takeover bid for Progressive’s parent, Foodland Associated Ltd, or it will become a subsidiary of another Australian retailer.
FAL used the takeover target’s statement, issued on Monday, to float its own spin-off suggestion as a defence against Metcash Trading Ltd’s $A846 million proposal, but most of the idea was contained in the independent appraisal by Grant Samuel Associates Pty Ltd. All FAL contributed was a potential timetable, absolutely zero other detail.
While FAL’s board ran down the Metcash proposal, Grant Samuel effectively said Woolworths Australia or Coles Myer Ltd would make the New Zealand business earn more than FAL or Metcash could.
Grant Samuel also said both FAL & Metcash needed to grow to compete in Australia, but said Metcash’s idea of selling off the Action retail chain would lose value.
Effectively, then, the issue is price, and consideration of that is in the hands of institutions. The top 10 FAL shareholders are institutions (one of which is counted 3 times), holding 66% of the shares.
The Metcash offer contains numerous loose ends, which institutions would get tidied up if they saw an appropriate price. At the moment Metcash has a long way to go on that part of the offer.
Foodland Associated’s board recommended investors reject the offer because Grant Samuel concluded:
it was neither fair nor reasonable
it materially undervalued FAL Australia
it offered no control premium for FAL NZ
synergies wouldn’t be adequately shared with FAL shareholders
the non-voting preference share consideration was highly uncertain
there was considerable tax uncertainty
separation of FAL NZ wasn’t guaranteed, and
superior alternatives existed.
Grant Samuel valued:
the offer at $A20.93-23.30, compared to FAL’s value of $A24.86-27.33
Metcash’s offer for FAL Australia at $A7.18-8.30, compared to its own valuation of FAL Australia at $A8.70-9.56.
It said Metcash was trying to buy FAL Australia for 5.4-7.4 times ebita, compared to an average 11.4 times ebita for comparable transactions.
Grant Samuel finds NZ options outside FAL or Metcash
Grant Samuel valued FAL’s New Zealand business at $NZ2.4-2.6 billion, representing multiples of 12.8-13.9 times projected ebita for the year to July 2005. “These are relatively high multiples, reflecting a judgment that the business would be extremely attractive to both Coles & Woolworths [Australia].
“Coles & Woolworths are facing diminishing growth opportunities in Australia. Foodland’s New Zealand business would be the last opportunity for either Coles or Woolworths to make a significant â€˜bolt-on’ supermarket acquisition that offered substantial in-market synergies. In the medium to longer term, these synergies would give Coles or Woolworths a strong competitive position in the New Zealand marketplace and the opportunity to win market share.”
Grant Samuel said merger of Metcash & FAL’s Australian operations, and demerger of the New Zealand business, “make compelling strategic sense”.
It said: “Both Metcash & Foodland’s Australian operations have an urgent need to increase their scale, to address the competitive disadvantage that they face in the Australian grocery sector relative to Woolworths & Coles. A merger of these businesses should produce considerable synergistic benefits and, arguably, is vital to secure their long-term strategic position.
“Foodland’s New Zealand retail business would almost certainly have greater value in the hands of Woolworths or Coles, both of which should be able to realise substantial synergies & other benefits not available to Foodland.
“A demerger of Foodland’s New Zealand retail business would facilitate the ultimate acquisition of the business by Woolworths or Coles, and the realisation by Foodtown shareholders of more value than they could reasonably expect were the business to be retained by Foodland (or a merged Foodland/Metcash).”
Grant Samuel said Metcash’s proposal to sell the Action supermarkets in Australia to independent operators would destroy value.
FAL says it’s started demerger
FAL said it had started a demerger of its Australian & New Zealand operations, and it was better placed than Metcash to manage such a demerger, which it said would take 6 months to complete. Like Metcash, though, FAL proposed listing the demerged FAL NZ in Australia, not in New Zealand.
The demerger would be subject to approval by FAL shareholders.
FAL chairman Len Bleasel said Metcash was trying to control an $A2.8 billion company for, at most, $A846 million in cash plus non-voting preference shares of uncertain value.
The 2 companies differ wildly on potential synergies: Metcash has estimated synergies of $A310-352 million in total, $A30-35 million in the first year, while FAL management believed $A85 million of synergies & savings could be extracted by the 3rd year.
The FAL target’s statement said ebita from the New Zealand supermarkets â€“ 57 Countdowns, 30 Foodtowns & 63 Woolworths – was $A149 million in 2004 and was forecast to rise to $A158.4 million in 2005. New Zealand franchise & supply was forecast to rise from $A10.1 million to $A11.3 million.
Grant Samuel said FAL was forecasting New Zealand supermarket sales of $3.9 billion, up 3.4%, ebitda up $10 million to $245 million, ebita up $6 million to $175 million, ebita margin steady at 4.5%, capex up from $86 million to $145 million.
The target’s statement doesn’t mention that growth in market share of the New Zealand subsidiary, Progressive Enterprises Ltd, from 26% to 44% in the 3 years to December 2004 came about with the takeover of the Woolworths chain, which helped it improve ebita over 4 years from $NZ63 million to $NZ192 million. What it says is: “These results have been achieved through a combination of acquisitions, organic growth & improved efficiencies and cost savings.”
Yes, a demerger plan â€“ but this paragraph was written beforehand
While FAL’s board has suddenly produced a demerger plan, the target’s statement says: “A key objective for the FAL group is the expansion of its store network, particularly in New Zealand & Queensland, to drive sales & ebita growth. The FAL group is on track to open 8 new Action stores & a further 3 New Zealand stores by the end of the 2005 calendar year.”
From that, it’s easy to suspect FAL’s demerger plan is nothing more than a last-minute twitch in defence, not a reasoned course of action.
Grant Samuel said the 3 Foodstuffs co-operatives had 56% of the $11.1 billion New Zealand grocery market compared to FAL’s 44% (the rest held by independents & convenience stores). FAL had picked up 1.4% market share in the last 3 months of 2004 but Foodstuffs had used price tactics to claw back some of that, at a margin cost.
Looking forward at the competition, Grant Samuel said the trend to closure of smaller-format stores meant Foodstuffs’ success would be concentrated in the hands of large-scale format owners, calling the co-operative model into question, as had happened in almost every other market round the world.
22 March, scheme meetings for capital restructure
5 April, court hearing
22 April, offer expected to close.
14 February 2005: Metcash starts reorganisation process
24 January 2005: Metcash puts $NZ2.17 billion midpoint enterprise value on FAL NZ
6 December 2004: Metcash proposes Foodland breakup with ASX listing for NZ business