Wellington, Oct 9 - The Warehouse Group Ltd, New Zealand's biggest-listed retailer, will scrap its foray into selling groceries because of poor returns, raising the likelihood that a takeover bid will soon be made for the company.
The move by the Warehouse is seen as undermining the legal basis on which New Zealand's regulator opposed a takeover from rival grocery firm Woolworths Ltd and Foodstuffs, but whether bids can go ahead is still likely to be determined by the courts.
"This takes away what appears to be the main stumbling block from a Commerce Commission point of view, as to why there were concerns about a takeover," said ING senior investment analyst Craig Brown.
Shares in the company, around half owned by founder Stephen Tindall and interests associated with him, gained as much as 16.5 percent following the news, and last traded up 13 percent at NZ$3.49.
Woolworths was reported last year as willing to pay up to NZ$7.15 a share for the Warehouse, and it has been seen as more likely to win any takeover battle because of its greater financial clout.
ING's Brown said that equity market weakness combined with a New Zealand economy in recession had lowered the price, but The Warehouse was still an attractive strategic asset due to its nationwide store network.
"It wouldn't be hard to get a valuation north of NZ$4, and possibly over NZ$5," Brown said.
LESSEN COMPETITION
The Court of Appeal on July 31 upheld the Commerce Commission's original decision that Woolworths and Foodstuffs, who each own 10 percent of The Warehouse, would substantially lessen competition if either firm owned the discount retailer.
Foodstuffs managing director Tony Carter told Reuters the decision by The Warehouse had changed the situation.
"Our advice is that the Commerce Act obstacles that Woolworths and Foodstuffs have faced should now be overcome and that there should be no legal reason why either party is not in a position to bid for up to 100 percent of the Warehouse," Carter said.
Woolworths, who has sought leave to challenge the Court of Appeal ruling in the Supreme Court, said it would evaluate whether the decision had any effect on its legal challenge.
The Warehouse said the returns from its "Extra" hypermarket format, trialled at three stores, were not enough to justify pursuing the idea.
The group said it would not roll out its Warehouse "Extra" stores, which offered groceries, meat and other food items, and phase out the operation in the three stores that have it, at a one-off cost of NZ$10-12 million ($6 million-7.2 million) in the current year.
The Warehouse sells a broad range of general merchandise in its 85 "Red Shed" stores, but had been experimenting with the "Extra" format as part of a possible move into hyperstores.
It said scrapping the format would deliver a pre-tax improvement of around NZ$9 million a year in operating earnings.
The Warehouse reported net profit after tax for the year ended July 31 of NZ$90.8 million ($59.3 million) compared with NZ$114.8 million the year before as New Zealand's economy slowed.