Metcash is making is second and almost certainly last attempt to marshall a viable competitor to Australia’s dominant hardware retailer, the Wesfarmers-owned Bunnings.
In fact if you look at the move announced by Metcash yesterday to finalise its long tipped purchase of the Home Hardware chain from Woolworths, it is actually the third attempt in the past five years by someone to set up a viable competitor to Bunnings.
Metcash bought a stake in Mitre Ten and then moved to control, which was its first move and the second overall after Woolies started on its loss-making Masters adventure that was to cost it around $3 billion in losses, with more to come as early as today when it is due to report its 2015-16 results.
As part of its hardware adventure, Woolies set up Masters with Lowes Cos, the second ranking US hardware chain, as well as buying the TradeLink and Home Hardware chains.
That flopped and never made a profit, instead it made a series of rising losses which culminated with changes in management and the board earlier this year and the decision to exit the experiment and close or sell off the various parts of the business.
The exit was confirmed late yesterday by Woolies ahead of today’s 2015-16 results announcement.
Metcash emerged as a determined buyer of Home (fighting off private equity interest from here and offshore) as it sought to give its Mitre 10 chain enough oomph to compete against Bunnings in the local market place.
Wesfarmer’s results yesterday said that Bunnings’ earning before interest and tax rose 11.6% to $1.2 billion (that includes five months from the Homebase chain in the UK). Bunnings Australia and New Zealand saw total store sales growth of 11.1% and store-on-store sales growth of 8.1% for the year. Revenue jumped 21.4% to $11.5 billion (including the Homebase contribution).
That’s a fat target for Metcash and its Mitre 10 and Home chains to take aim at.
Yesterday’s announcement from Metcash said its hardware chains will have around $2.2 billion a year in sales – well behind Bunnings
Metcash will combine the Home chain, with over 400 stores, (at a cost of $165 million from Woolworths), with Mitre 10 creating a new 900-store rival to Bunnings.
“The combination of the two businesses will mean that Metcash’s hardware business will have a turnover of [about] $2 billion," Metcash chief executive Ian Morrice said in a statement
"This increased scale, together with the opportunity to realise significant efficiencies, will enable us to be more competitive and deliver a better outcome for both our hardware retailers and their customers."
Metcash said it would close Home’s Victorian distribution centre in Dandenong, near Melbourne, which was no longer needed under the new combined business, and would shut two loss-making Home stores.
There are 43 company-owned Home stores and 363 independent stores. Home also supplies goods to 865 unbranded stores, bringing the total Metcash network to over 1200 outlets.
The competition watchdog, the ACCC gave the purchase its blessing last month.
Metcash says it will fund the investment with $80 million in equity through a institution placement and $85 million in debt drawn from existing facilities. Details are due to be revealed today.
But the purchase also means Metcash will delay the resumption of paying dividends from next year, as previously announced, to 2018. The original delay was part of Metcash’s big restructure which seems to be paying off. Metcash shares remained in a trading halt at $2.06 to allow the placement to take place. Woolies shares remained halted at $24.22.
Now for Woolies big loss today, estimated to be around $1 billion.
In a statement issued after trading closed yesterday afternoon, the retailer said it was quitting Masters completely and laying off thousands of people, or finding work for them at existing supermarkets or at the new large formats to be run by the purchasers of most of the Master’s stores, a group called the Home Consortium. In a complicated three way series of transactions Woolworths said that, following a seven month sale process, it has agreed to sell its Home Improvement business, Hydrox (a joint venture of Woolies and US hardware group, Lowes) to a collective bidder group of GA Australia, Metcash and Home Consortium.
GA Australia is the local arm of auctions group, General American of the US which will sell of the inventory of Masters. The Metcash deal is detailed above.
And the Home Consortium deal will see the company (which is comprised of the investors behind three major Australian privately owned companies – Aurrum Group (an aged care group), Spotlight Group (a manchester retailer) and Chemist Warehouse Group – purchase the Masters properties through acquisition of 100% of the shares in Hydrox.
"The transaction will include 40 Masters freehold trading sites, 21 Masters freehold development sites and 21 Masters leasehold sites. Home Consortium plans to repurpose the former Masters sites into multi-tenant large format centres,” Woolies statement said.
Woolworths will acquire three Masters freehold sites and take assignment of 12 leases to facilitate a complete exit of Hydrox
After estimated wind-down costs, Woolworths expects to receive gross proceeds of around $1.5 billion, which will approximately be a net fogure of $500 million prior to any shareholder payments, following Lowe’s consent to the Home Consortium transaction.
Woolies says all Masters stores will close by December 11 at the latest.
The Home Consortium plans to turn the Master’s stores into large format (mini malls) stores to be anchored by leading Australian home, hardware, family and lifestyle retailers.
So far, Spotlight, Anaconda, Chemist Warehouse, JB Hi-Fi, The Good Guys, Super Amart, BBQs Galore, Boating Camping Fishing, Super Cheap Auto and Amart Sports, as well as Woolworths Supermarkets, Dan Murphy’s and even Bunnings have agreed to lease space in the proposed centres.
The concept would be launched in the next couple of months, with the expectation the plan will create about 8000 jobs, ”more than offsetting job losses following the closure of Masters later this year”, Home Consortium said in its statement yesterday.
The first of the centres will open early in 2017. And it will be a competitive concept that existing retailers and retail property owners (such as Scentre and Shopping Centres of Australia) won’t particular like.
