Metcash expansion moves into gear

Fresh from his victory over the Australian Competition and Consumer Commission earlier this year, which cleared the path for Metcash's $215 million Franklins acquisition, and in the midst of a massive restructuring, Andrew Reitzer is again in expansion mode.

While announcing an April year result that was disfigured, as foreshadowed earlier in the year, by $176.7 million of write-downs and restructuring costs, he also announced two significant acquisitions, totalling as much as $145 million and flagged another $80 million to $100 million of ‘'bolt-on'' buys over the next six months.

One of the acquisitions was predictable and flagged earlier this month. Metcash will exercise its right to buy the 49.9 per cent of the Mitre 10 hardware group that it doesn't already own, while also investing in a Victorian hardware joint venture. The overall investment will be $65 million to $70 million.

Metcash bought into Mitre 10 in late 2009 – joining the hardware wars between Woolworths and Wesfarmers in the process – when Mitre 10 was under significant pressure.

In today's results announcement Reitzer revealed Mitre 10 had lifted its sales from $798 million to $833 million and earnings before interest, tax and amortisation (EBITA) for the year were $21.2 million. The performance of the Mitre 10 network since has presumably vindicated that original decision and the initial $55 million investment.

Today Metcash announced another diversification away from its traditional grocery and liquor wholesaling operations. It will acquire 75.1 per cent of the Automotive Brands Group for $53.8 million, with the right to move to full ownership over the next three-to-five years. If it moves to 100 per cent the total cost will be $70 million to $75 million.

ABG is the largest privately-owned distributor and franchisor in the automotive parts and aftermarket sector and the third largest operator in the sector. It services a network of more than 240 stores, owns and manages the Autobarn brand and the Autopro dealership group.

Reitzer cited the success of the Mitre 10 deal as the basis of Metcash's confidence it could manage an expansion into a new business segment. He said there were 2500 independent operators and service stations which could be potential customers.

He didn't identify the other acquisitions Metcash has targeted but said they were all within its core competencies of supply chain management and distribution and, on a stand-alone basis, would be earnings per share accretive.

It makes strategic sense for Metcash to deploy its wholesaling and retailing capabilities across a broader range of sectors.

It was evident – when Reitzer announced nearly 500 job losses, heavy cost-cutting, the repositioning of some of its businesses and significant impairment charges – that its traditional businesses were being caught in the cross-fire between grocery giants Woolworths and Coles and the heavy discounting of key staples that had been occurring.

With the grocery wars continuing across an ever-expanding front, and the hardware war starting to heat up, it also makes sense for Metcash to shore up its balance sheet while diversifying its earnings base.

To fund the acquisitions and restructuring, repair its balance sheet and finance an ambitious program of automating its distribution centres – at a cost of $70 million to $80 million for each centre – Metcash also announced a $325 million equity raising.

Absent all the significant items related to the restructuring and impairments, Metcash produced a reasonably creditable underlying result in a very difficult environment, with underlying earnings after tax rising 2.5 per cent to $262.5 million on wholesale sales that rose a meagre 1.9 per cent. Its statutory earnings fell 63 per cent, from $241.4 million to $90 million.