Buying back the barn

Stephen Tindall is likely to be in a position to buy out his equity partner in the next few years

Stephen Tindall's bid to privatise The Warehouse is just the first step in his new mission. The man who 24 years ago dreamed up plans for nationwide chain of discount stores believes he can once again have complete control of his creation.

Some time in the next five to seven years it is likely he will be in a position to buy out his proposed ally Private Equity Partners (PEP). By that time he expects to have reshaped the Red Shed landscape.

Without the cumbersome baggage of a public listing he will be free to "push out a bit harder" and "take more risk", he said yesterday.

The accelerated introduction of hypermarts, such as the one at Auckland's Sylvia Park, are central to his plan, one that would once again see Tindall beating the international retail giants to the punch, ensuring that the nation's biggest retailer continues to have a stake in its community.

It's a fine vision - one that certainly has the hard heads at PEP convinced. But before it can fly there is the matter of those pesky shareholders - in particular a competitor, supermarket chain Foodstuffs, which holds a 10 per cent stake and could potentially block the bid.

The relationship between The Warehouse and Foodstuffs has always seemed awkward. The companies say they are not arch-rivals yet Foodstuffs decided to not use its shareholding in The Warehouse to seek a place on the board because of potential conflicts.

Soon after the Foodstuffs' July purchase of its Warehouse stake, executives from the two companies got together to look at possible synergies.

"They clearly wanted to have a chat to see if there were going to be synergies. Lawyers were present just to make sure that nobody did anything wrong," Tindall said.

But whether or not Foodstuffs sells, Tindall and PEP appear to be committed to forging ahead. At this stage, says Tindall, there are no conditions on the share offer.

Nevertheless Foodstuffs' 10 per cent blocking stake puts it in the box seat as far as deciding the ownership structure of the new Warehouse.

Foodstuffs NZ chief executive Tony Carter says the company is not in any panic and points out the offer has not yet been formally made.

He agrees with Tindall that Foodstuffs doesn't see The Warehouse and its new grocery operating in the same way as it sees rival supermarket company Progressive Enterprises.

In other words, it may not consider Tindall a direct competitor despite his plans to expand further into grocery, because even though there will be some overlapping, substantial differences will remain.

For its part, if PEP sees Foodstuffs as a threat to the deal it certainly isn't letting it show. The company is understood to be outwardly relaxed about the prospects of Foodstuffs using its 10 per cent holding as a blocking stake. That's based on a view that Foodstuffs bought the stake as a defensive play, based on market talk that Tindall was about to sell, possibly to an aggressive international player such as Woolworths, Coles Myer or even Tescos.

Now it is clear that Tindall is a buyer, not a seller, the need for Foodstuffs to hold a defensive stake is removed and the co-operative can walk away with a tidy profit. At least that's what PEP is understood to be hoping.

Despite the stance both bidders are taking, there is little doubt that Tindall or his bankers will be talking to Foodstuffs soon.

One of the complicating factors for any Foodstuffs' decision about a sell-out will be its ownership status.

Foodstuffs New Zealand is a federated company owned by three co-operatives. The shares are not held by Foodstuffs New Zealand but by the three individual co-operatives in Auckland, Wellington and the South Island.

It seems unlikely but in theory any one of the co-operatives could sell out, taking Tindall and PEP past the 90 per cent trigger for a compulsory buyout.

That kind of complexity could be one of the reasons that Carter - who found out about the deal only on Thursday - is keen to take his time before indicating whether Foodstuffs might sell.

"There is a formal understanding that we will discuss among ourselves to reach a formal position," he says. "The co-operative will consider, we will be required to make a decision, but it is certainly not something we are running around in a panic about."

Tindall says he expects PEP to hold its stake in The Warehouse for only a few years.

"Private equity companies could typically be expected to stay five to seven years."

After that, he could buy out PEP and own the entire company once again.

By that time much of the debt from the expansion could be paid off, and Tindall could have enough financial muscle to take the rest of the company over, he says.

Those close to PEP say the relationship with Tindall is based on a solid foundation of respect and a shared vision for the development of The Warehouse.

Tindall - who approached PEP himself - did not do so simply seeking financiers and there is no question that he is hoping they will bring management expertise to the table.

If this deal was being done just to delist - with no plans for capital expansion - then it's likely Tindall could have done it on his own.

PEP has a number of people with experience in retail, Tindall says. But he doesn't want to talk about what the present Warehouse management team - which has driven the company's recovery from its disastrous expansion into Australia - might be lacking.

"We've had a fantastic team and take nothing away, their turnaround has been remarkable."

Some argue that Tindall owes it to the market to reveal more detail about what he'll do with The Warehouse.

"He's come out and made this statement that he thinks the company is better in a private guise than a public guise. To me it's far from clear that this is the case and if he's got plans for The Warehouse then he should talk about those plans so that people can make their own judgment," says AMP Capital Investors' head of equities Guy Elliffe.

AMP has a stake of nearly 1 per cent. It was too early to say whether it would sell into the deal at $5.75, Elliffe said.

A bargain?

* Stephen Tindall and Pacific Equity partners want to privatise The Warehouse.

* They are offering $5.75 a share.

* This is 51 per cent above the level before supermarket co-operative Foodstuffs bought into the company.

* It is 22 per cent higher than the average broker valuation of $4.70 a share.