Metcash and Anchorage Capital Partners share a dilemma – how much to offer for Woolworths’ Home Timber and Hardware when they can’t predict customer numbers, sales or earnings. Source: Australian Financial Review
Analysts believe the hardware wholesaler, previously known as Danks, is worth between $175 million and $250 million, based on sales of about $940 million and earnings before interest, tax, depreciation and amortisation of $27 million in 2015.
However, scores of independent Home Timber and Hardware members have quit the network over the last few years and more are expected to leave if either Metcash or Anchorage Capital Partners is the successful bidder in a long-running auction due to wrap up later this month.
Industry sources said independent retailers were nonplussed about a merger of Home Timber and Hardware and Metcash’s Mitre 10, which would lead to a two player market consolidating into one.
“HTH and Mitre 10 have been rivals for many years and indeed many HTH members’ existing customers are likely to have rebuffed approaches from Mitre 10 to join in recent years,” said JP Morgan analyst Shaun Cousins.
However, HTH members are also wary of a takeover by Anchorage Capital Partners and being treated as a lucrative source of profits before the private equity firm sells or floats the wholesaler in a few years, as it did with Woolworths’ Dick Smith.
“Some don’t want to end up with Mitre 10, some are keen to get in [to Mitre 10] but they don’t want to be sold to private equity,” said a Metcash insider. “They see themselves being caught up in a game of “fatten and flick”, where they would be the victims.”
Metcash is aiming to overcome members’ concerns and those of the Australian Competition and Consumer Commission by promising not to dictate how much stock retailers must buy through Mitre 10 and promising to supply independently-owned stores on no less favourable terms as nearby company owned stores.
However, industry sources say the undertakings, which were released for comment by the ACCC, were “toothless” and did not go far enough, pointing out that HTH and Mitre 10 members sourced between 30% and 50% of products from other buying groups or directly from suppliers.
They believe Metcash should be forced to accelerate the sale of almost 100 company-owned Mitre 10 and Home Timber stores, and make undertakings about key issues such as marketing support, trading terms and access to private label goods.
It is understood that neither Metcash nor Anchorage have yet had an opportunity to address HTH members en-masse to explain their plans for the business and ease their concerns.
The undertakings are likely to improve Metcash’s chances of securing ACCC approval. However, they could affect the price Metcash is prepared to pay for HTH. If Anchorage is the successful bidder, Metcash could step up efforts to lure HTH members to Mitre 10.
“Metcash is the natural owner of (HTH) – I think they’ll pick up most of those customers one way or another,” said one Metcash shareholder. “Either they buy the business or the customers come to them anyway – customers will go to where the strength is,” he said.
“Instead of paying money to buy the business they could use that money to entice them to join Mitre 10, whether it’s money upfront or giving them some incentive to refurbish the stores,” he said.
“I’m sure they won’t be walking away – it’s a big market opportunity for them.”
Woolworths is attempting to shore up store numbers during the sale process by extending a 2% “retention rebate” or discount on purchases for another three months until September 30.
