THE DISTILLERY: Metcash misery

Jotters pick apart the wholesaler's transformation, while one wonders if Woolworths will pick an ACCC fight.

A profit downgrade, equity raising and non-core acquisition is, at the very least, a busy afternoon. In this morning’s edition of The Distillery, Australia’s business commentators run their eyes over a company that’s hardly distressed, but is undergoing a transformation in less than ideal conditions. That can be distressing.

Fairfax’s Elizabeth Knight says Metcash’s circumstances could hardly have made yesterday more difficult.

"Grocery wholesaler Metcash ticked all the wrong boxes yesterday. It delivered a full-year profit that was below expectations, it announced plans to buy a non-core business and it decided to raise capital in a shabby equities market. To make matters worse, Metcash is also feeling the increased financial heat from legacy deals – having to write off loans and investments in supermarket retail joint ventures. This is a company in the middle of an exercise in reinvention. But it's a process that is being undertaken in a very difficult environment.”

The Australian Financial Review’s Chanticleer columnist Tony Boyd says it’s easy to find fault with the Metcash raising, however…

"Unlike Billabong International, which needed to rebuild its balance sheet before breaching its banking covenants, Metcash is conservatively geared and operating well within its interest-cover numbers. A renounceable issue would have been fairer to shareholders, and Reitzer is raising about $186 million more than is necessary to cover the acquisitions in hardware and automotive parts distribution through a chain of 241 stores. The excess capital being raised without an obvious immediate purpose drew criticism from analysts concerned about the need for transparent return on capital targets. But any decent equity capital markets banker will tell you that when companies go to the well for funds it is far better to provide for investment flexibility and to cover contingencies rather than be forced to come back a second time.”

Business Spectator’s Stephen Bartholomeusz says the acquisition of the rest of Mitre 10 was predictable, as it was flagged earlier. It was the other acquisition that’s interesting.

"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.”

Meanwhile, The Australian’s John Durie says ACCC chairman Rod Sims has drawn a line in the sand over 5 of the 31 bottle shops Woolworths sought to acquire.

"The move follows Sims's threats earlier this month and presents the retail industry with the chance to test the law. Any challenge by Woolies would delight Sims, but last time the retail giant backed down by deciding not to proceed with a proposed Launceston bottle shop. Woolies is considering its next step but is likely to offer to not proceed with one planned purchase at Umina on the NSW Central Coast. It will settle on 20 of the hotels to be acquired from the Laundy family on Monday and will consider whether to challenge the deals questioned by the regulator.”

Elsewhere, Fairfax’s Malcolm Maiden says we should expect to be disappointed by this profit season.

In company news, The Australian’s Damon Kitney says Fairfax Media had no choice but refuse Gina Rinehart’s demands to maintain stability in the boardroom, while his colleague Bryan Frith says the mining billionaire must surely be aware that she’ll need to do more to secure some directorships.

The Australian’s Barry Fitzgerald says the real message of Santos’ release yesterday was lost in the confusion that it had incurred some big cost blowouts. Fairfax’s Michael Pascoe asks how it could possibly be that Sony didn’t invent the iPod.

In other news, The Australian’s Glenda Korporaal urges her readers to check they haven’t tried to voluntarily contribute too much to their superannuation funds. The Australian’s economics correspondent Adam Creighton ushers in, with some hesitation, the Carbon Tax.

And finally, Fairfax’s Ian McIlwraith finds investors trying to reclaim $700,000 from a failed float earlier this year discovering to their surprise that essentially the same company is in the midst of a backdoor listing.

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