Buy-up spree touted for Metcash after profits slide

Jane Harper
Herald Sun
June 29, 2012

GROCERY wholesaler Metcash is seeking an immense cash injection to bankroll an acquisition spree following a dramatic slide in profitability.

The group, which supplies groceries to IGA supermarkets, will raise up to $375 million by issuing new shares. It will use funds to buy out hardware store Mitre 10 and fund other acquisitions.
It comes after restructuring costs sent the group’s full-year profit plummeting 63 per cent.

Metcash chief executive Andrew Reitzer said the new acquisitions played to the company’s strengths.

He rejected suggestions from retail analysts that Metcash was diversifying to prop up its food and grocery business, which recorded sales growth of just 2 per cent amid a testing environment.
“There’s nothing wrong with the IGA business,” Mr Reitzer said. “Our supermarket business would be the envy of many companies around the world.”

He said the sustained price war between Coles and Woolworths had continued to drive food prices down.

The price war had educated shoppers to wait for special offers, and IGA customers had started shopping more frequently, but were buying fewer items and cherry-picking discounts, he said.

Metcash’s expansion includes the $53.8 million acquisition of a 75 per cent stake in Autobarn owner, the Automotive Brands Group, and it is investing $80 million in introducing automated packing technology in Metcash’s distribution centres in 2014.

Metcash said yesterday that net profit for the year to April had dropped to $90 million after the company had to fork out $176.7 million for costs including its major restructure, involving the closure of 15 Campbells Cash & Carry supply stores, as well as the acquisition of Franklins supermarkets last year.

Net profit was down from $241.4 million in the previous year. Metcash said underlying profit grew by 2.5 per cent to $262.5 million, while underlying earnings rose 3 per cent to $451.2 million, in line with guidance.

City Index chief market analyst Peter Esho said the company’s latest acquisitions showed Metcash needed to explore new avenues in the face of supermarket price wars.
Metcash declared a final, fully-franked dividend of 16.5c.

The company’s shares were put in a trading halt yesterday, and last traded at $3.74.