Sims set to come out swinging

John Durie
February 14, 2013
The Australian

IF there was any doubt about Australian Competition & Consumer Commission chief Rod Sims’s intention to take legal action against the supermarket behemoths, his parliamentary testimony has put that to rest. Now it’s just a question of when and what issue is chosen.

For the past couple of years, Woolworths was in the spotlight in its pacman-style raids on smaller stores, providing healthy retirement funds for their prior owners. But, whenever the ACCC has raised a challenge, Woolies has backed off.

This time it’s Coles that is in the firing line.

In his Senate testimony, Sims for the first time backed the formation of a legally enforceable code of conduct governing relations between the big supermarkets, and indicated his concern about the impact of shopper dockets on the petrol market.

Sims’s comments were quickly backed by his minister, David Bradbury, who wants to go to an election as supporting programs delivering consumer benefits and curbing big business abusing its power.

The move by Coles to lift the discount from 5c to 8c a litre triggered the new concerns, not because Sims is against cheaper petrol but because he fears that if the supermarkets are using their market power to subsidise fuel prices it distorts that market and makes it hard for people to compete.

He described the supplier complaints as “constant, credible and consistent”, and added: “The allegations suggest behaviour that does not conform to acceptable practices.”

The shopper docket probe was reopened after Coles substantially increased its discounts not long before turning its attention to revamping the “convenience store” model. The issue is not lower prices for consumers, but the alleged subsidies for another distribution channel, which may alter the competitive dynamic for rival petrol marketers and IGA et al. In being increasingly prescriptive, Sims is also making it harder to finish the year without having launched some sort of litigation.

The latest tactic aimed at overcoming supplier reluctance to complain publicly about Coles and Woolies is a slew of section 155 discovery notices to force them to come forward. Suppliers, too, will be on notice given their behaviour is not always perfect — or, as some say: “There are not too many virgins in a brothel.”

Sims is right to wage his campaign because the balance of power is heavily weighted in the behemoths’ favour, and that is where a competition regulator needs to be in an attempt to deliver better consumer outcomes.

Suffice to say, Wesfarmers is ready for the fight, having among other measures not so long ago enlisted former Woolies star lawyer Gilbert & Tobin’s Gina Cass-Gottlieb. The battlelines are drawn and the lawyers are dreaming about how to spend their coming returns.

Coles delivering
AT a recent staff meeting, Wesfarmers boss Richard Goyder warned people not to get too excited about the company’s rising share price, citing the river of money flowing into equities as being a bigger driver than actual earnings.

He is right, but in the scheme of things yesterday’s profit was a creditable effort, with earnings up 9.3 per cent on a 3.2 per cent increase in revenues.

Leave to one side the fact that return on funds at 8.8 per cent compares with the near-term peak of 31.1 per cent in 2006 and the pre-Coles level of 25.1 per cent — at least they are improving.

Six of the nine divisions also increased their returns, but only five remain above the cost of capital, with Bunnings the star at 25.5 per cent, albeit below last year’s levels.

Hardware boss John Gillam has spent about $2.2 billion over the past four years buying land, which will soon house new warehouse stores as he ramps up space by a massive 25 per cent during the next three years.

By converting the land into operating stores he achieves several goals: flooding potential rival Woolies out of the market and creating property to recycle into a trust to take it off his balance sheet, improving his returns.

Guy Russo at Kmart is earning legend status, lifting his returns from 15.9 to 22.5 per cent while Ian McLeod (also known as “the genius”) is steadily improving Coles returns, which rose from 8.2 per cent to 9.2 per cent.

Coles needs to perform because it accounts for $15.6bn in capital — more than the other eight divisions combined.

The company increased dividends by 10 per cent to 77c a share, putting it on track to top last year’s return of $1.65 a share.
Given 2014 is both the Coles and Wesfarmers centenary, what chance is there of meeting some internal targets of returning to the $2-a-share dividends of days past?

More than five years after the transforming Coles acquisition, the conglomerate has some laggards in Target and its resources arm — which, with the promised revivals, will make that internal wish easier to achieve.

Short sellers suffer
SHORT sellers copped another bucketing yesterday with AWC’s surprising $452 million placement to Hong Kong-based Citic at a tiny premium of just 3.5 per cent.

The move has sent the AWC stock price up some 7.5 per cent to $1.29 against the placement price of $1.23 a share, but the prevailing comment was: “Why?”

This deal solved a perceived debt problem by allowing Alumina to use the proceeds to cut its borrowings from $681m to $216m. But then critics say the company was overly cautious because it was already slated to get a $100m dividend payment from the AWAC joint venture.

As “strategic” shareholders go, Citic is not exactly everyone’s prize. Its conflicting stakes in other aluminium ventures and its less-than-transparent structure raise doubts about its motives.

It now owns 13 per cent of the joint venture, which was created nearly a decade ago when former WMC boss Hugh Morgan split the company to make it more saleable, triggering a bidding war eventually won by BHP Billiton over Xstrata.

The 60 per cent joint venture company Alcoa has a market value of about $9bn and debts of $10bn so is hardly in a position to buy out AWC any time soon.

In any case, Citic is now strategically positioned to make it more difficult given it can block a scheme of arrangement.
Existing shareholders like Ashok Jacob and David Paradice can’t really complain because their stake is worth more.

They may be dismayed that the early signs of a bull market have not resulted in deals like days past, where rumours of a capital raising laid the ground for a deeply discounted issue and the existing shareholders made out like bandits.

The AWC board put an end to that game, but what happens next is more problematic.

Tony Burgess from Flagstaff advised WMC on the split, and has now advised AWC on the capital raising, which has caused angst among the rival investment banks and some shareholders who are angry they missed out on the deal.

The club has missed out and is squealing.

The shorts who were killed with JB Hi-Fi’s better-than-expected profit and Bradken earlier this week have missed out again — which is not causing too many tears outside that community.