Foodland acquires Woolworths

By NZPA

Wednesday 12th June 2002

Dairy Farm International Holdings said tonight it would sell its New Zealand supermarket chain Woolworths (NZ) Ltd to Australian grocer Foodland Associated for $NZ690 million.

The deal announced by Hong Kong-based and Singapore-listed Dairy Farm will nearly double Foodland's share of the New Zealand grocery market.

Market sources had told Reuters the deal would be worth just over $700 million, with Foodland partly funding the purchase with an $A300 million ($NZ354.27 million) equity raising.

In a statement tonight, Foodland announced its New Zealand subsidiary supermarket operator Progressive Enterprises Ltd had entered into an agreement to acquire Denstree Corp Ltd, the holding company of Woolworths NZ.

It will get Woolworths, its three warehouses, 85 supermarkets and 26 mini-marts under various names in the deal.

The deal followed clearance by the Commerce Commission and authorisation from the Overseas Investment Commission, Foodland said.

"The merger will join the two smaller players in the market, creating a more dynamic business with increased market share," Foodland group managing director Trevor Coates said.

"We expect that synergy benefits of the combined group will emerge over a three-year-period. These will be driven by a combination of brand rationalisation, reduced marketing costs and supply chain economies.

"The increased purchasing power... will ultimately allow the combined business to be a more effective competitor to the dominant market leader resulting in increased competition and better choice and value for the New Zealand consumer," he said.

Foodland chairman Don Humphreys said it was a very important transaction for the group.

Trading in Foodland shares was halted today pending an announcement.

The stock closed on Friday at $A19.01, near its record finish of $A19.36 a month ago. Australian financial markets were closed on Monday for a public holiday.

Dairy Farm ended two cents higher at $US0.88 in Singapore.

In a statement, Dairy Farm chief executive Ronald Floto called Woolworths a "fine, high performance company" but said the sale would allow the group "to concentrate our investment and management attention in our key markets in Asia".

"Dairy Farm will realise a gain on sale in excess of $US200 million ($NZ414.33 million)," the statement said, adding that the disposal was expected to be completed by early July.

"The proceeds, after repayment of the term loans in New Zealand, will be added to Dairy Farm's cash and liquid assets to enhance the group's financial strength as it pursues expansion opportunities in Asia."

Cheery market sentiment for Foodland has propelled the expansionist grocer's share price 125 percent since May 2001 when it first approached Dairy Farm about buying Woolworths NZ, which had turnover of $1.6 billion in 2001.

"I would expect the stock to settle above $A20," said David Spry, head of research at Melbourne-based broker F W Holst & Co.

Speaking before the Dairy Farm announcement, he said the expected acquisition price was fair and was earnings per share accretive for Foodland, despite the equity raising.

"It'll certainly be a positive. There's no doubt about that," Mr Spry said, adding that initial synergies would total about $50 million, mainly from the enhanced buying power enjoyed by bigger grocers.

Perth-based Foodland moved outside its traditional Western Australia market to Australia's crowded eastern seaboard after buying some 40 Franklins supermarkets from Dairy Farm, doubling quarterly sales posted by its Action supermarkets.

New Zealand courts and competition regulators tried to block it from pursuing Woolworths NZ. But the Privy Council cleared Foodland on April 30 to pursue the acquisition.

The deal will make Foodland's New Zealand-based Progressive Enterprises arm the country's number two grocer behind the dominant Foodstuffs group.

The acquisition would lift Foodland's A$1.9 billion market capitalisation by about A$500 million, analysts have said.

Australia's biggest grocer Woolworths Ltd , unrelated since 1979 to the New Zealand operation of the same name, has also held talks with Dairy Farm on Woolworths NZ and conducted due diligence on the business.

Woolworths stock closed nearly 1 percent up at A$13.35, near its A$13.59 record high close on April 23, as the overall market fell.

"The new speculation is that this acquisition makes Foodland a takeover target, and (Australian) Woolworths and (Britain's) Tesco are interested," Mr Spry said.

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