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.