Metcash seeks $375m to boost its war chest

Rebecca Urban
The Australian
June 29, 2012

METCASH is banking on strong support from institutional investors, after kicking off the first stage of a $375 million equity raising overnight to fund the expansion of the business into the hardware and auto supply sectors.

Metcash boss Andrew Reitzer and his management team spent yesterday afternoon meeting with fund managers in a bid to drum up support for an institutional share placement, announced as the company revealed a 60 per cent slide in profit and the acquisition of the Autobarn and Autopro car parts and accessories businesses.

But Mr Reitzer denied that the acquisition was designed to address constrained growth in Metcash’s core grocery business, which recorded a 2 per cent rise in wholesale sales to supermarkets last year. He said Automotive Brands Group, owned by Melbourne’s Dumbrell family, would complement the broader Metcash business model, which was to provide branding, wholesale and logistical support to group franchises.

Automotive Brands distributes products to a network of more than 240 stores and brings in annual retail sales revenue of about $400m. Metcash will take a 75.1 per cent stake in the business for $53.8m, with an option to go higher over the next three to five years

Metcash recently decided to move to 100 per cent control of hardware chain Mitre 10.

“It’s the same business but the product is different,” Mr Reitzer said. “We always said we would look for opportunities where our business model applies. And as they arise . . . we will do that.”

Metcash is the latest in a string of companies to tap the market for fresh capital, following similar moves by Echo Entertainment and Billabong International in recent weeks. The underwritten placement, conducted via a bookbuild, aimed to raise $325m and will be followed by a $50m share purchase plan for retail investors.

As well as funding the Automotive Brands acquisition, Metcash intends to use the proceeds to complete its acquisition of Mitre 10 for about $67m and to finance about $90m in planned bolt-on acquisitions.

A fund manager who declined to be identified said there was some scepticism about Metcash’s results, including the large number of non-recurring items.

The company reported profit for the year ending April 30 of $90m, down from $241.4m the previous year. Significant items, including impairment and restructuring costs as well as the cost of the Franklins acquisition, amounted to $176.7m.

Evans & Partners’ Tony Wilson holds a negative view on the stock but said the capital raising was “the prudent thing to do” given Metcash’s ambitions.

“The business is under pressure. It tried to present a unified front, saying that things are okay, but if you look at the underlying sales growth, its operations are under pressure relative to Coles and Woolworths,” Mr Wilson said.

Mr Reitzer said Metcash had performed strongly despite tough trading conditions, including the impact of the ongoing marketing war between the major retailers and subsequent price deflation.
The shares, suspended for the capital raising, last traded at $3.74.