Warehouse takeover bid

For the third year in a row, retailing performance is likely to be low on the list of concerns among shareholders attending the annual meeting of The Warehouse in Auckland tomorrow.

The questions are likely to be the same as they were in late 2006. Is the company going to be taken over and when?

Stephen Tindall, who controls around 52 percent of The Warehouse, still holds the key to the future of the company he founded. As he is just a non-executive director of the company these days, it is unlikely he will be scheduled to speak to Friday's meeting. But it is probable that shareholders will put the pressure on (as they did last year and the year before) for him to get to his feet and say a few words. It's likely, however, that once again shareholders will get little meat on the carcass. Tindall will most probably reiterate that he will aim to do the best by the company and the shareholders.

Behind the scenes there will have unquestionably have been very recent further, separate, negotiations between Tindall and the supermarket giants Woolworths and Foodstuffs over a possible takeover. Both of the supermarket giants were blocked from making bids when the Commerce Commission successfully appealed against a High Court ruling that such bids could be made.

However, on October 9 The Warehouse blew that out of the water by deciding to stop the move it had made into supermarket retailing with its Warehouse Extra concept. While analysts have speculated that one or both of the supermarket companies will reapply for Commerce Commission approval, they are wrong. Neither party will, because neither party now believes it needs to.

The commission's argument had been that independent Extra could lead to increased competition in the supermarket sector. But Extra is now being wound down and the hurdle is gone. The Warehouse is well under way with plans for the three Extra stores to be converted simply into normal Red Shed general merchandising stores. The company has put the exit and restructuring costs at $10m to $12m before tax but says the move will lead to annualised pre-tax improvements in operating earnings of about $9m. With Extra out of the way both Woolworths and Foodstuffs are keen to strike a deal with Tindall. But price is the big snag.

Before the commission blocked any takeover Woolworths had indicated it was prepared to offer $7.15 a share for The Warehouse. The Australian company paid $6.50 a share for its 10 percent stake, compared with Foodstuff's entry price for its 10 percent holding of about $5 a share.

Doubtless both supermarket companies will now be arguing conditions have changed enormously since 2006 and therefore any acquisition of The Warehouse should be at a much lower price level. The Warehouse stock has been hovering under $4 recently.

From Tindall's perspective, however, there is little reason to rush. He does not have to sell and he will hold out for what he sees as the right price, still likely to be about $8. It appears unlikely any deal will be reached before Christmas and, indeed, Tindall will probably want to see how The Warehouse handles its most crucial trading period in what are truly awful times for retailers.

Shareholders are likely to get a brief update at the annual meeting on latest trading. However, this will probably not add much to the $322.4m first-quarter sales figures presented to the market on November 7.

Both on an overall and same-store basis, the figures were down 1.6 percent on the same time a year ago. Other major retailers such as Briscoe Group and Hallenstein Glasson have actually reported much bigger drops than this recently - Briscoe down 8 percent and Hallenstein Glasson nearly 7 percent lower. As a store that grew up in relatively tough times in the 1980s and 1990s, The Warehouse would rate its chances of holding, and perhaps even increasing, its market share during the downturn.

Relatively robust Christmas trading figures would provide Tindall further ammunition with which to drive up any takeover bids. The likelihood remains that a deal will be done, possibly more toward the middle of next year.

Woolworths and Foodstuffs would still be able to raise the cash despite the credit crunch. Woolworths may ultimately be the more desperate to bolster its position in New Zealand since anecdotally it is still losing supermarket share to Foodstuffs.

In 2006 pretty much all the shareholders present at The Warehouse's annual meeting believed that it would be the last one. Three meetings on nobody will want to be so bold as to definitely say this will be the last time - but it really might be.

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.

Foodstuffs and Woolworths have up to 20 days to decide on whether to appeal the court decision blocking any takeover bids for The Warehouse.

Legal experts were surprised at yesterday's Court of Appeal decision, having previously believed the Commerce Commission faced an uphill task overturning the High Court judgement granting the all clear to the two suitors. "These competition issues are difficult, and it's the hard cases that go to court," said Tony Dellow, competition lawyer at Buddle Findlay. To me I always thought that they would get the clearance. We've got to see the reasons I guess but to me, the High Court decision was very factually-based and they're hard to turn over, so I suppose the commission's done well in that sense. That being the case, there must be a fair prospect of an appeal."

The reasoning behind the decision has yet to be made public, as lawyers for Foodstuffs, Woolworths and The Warehouse are still to appear before the court again to be heard on what commercially sensitive information should be deleted from the judgment that is to be made publicly available.

Simpson Grierson senior associate James Craig said the parties also needed to work out if an appeal to the Supreme Court was an option.

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.