Richard Inder: Desperate bid for Warehouse

Keith Smith yesterday made a bold claim. The Warehouse chairman said Foodstuffs' $150 million raid on the retailer's share register showed his company's plan to sell groceries was a winner.

Businessmen are by their nature optimists and it is for this reason their every utterance should be taken with at least a grain of salt.

But, in this case, there are good grounds to take Smith's word.

Foodstuffs' bid looks desperate. If it succeeds in its stated aim of getting 10 per cent and no more, it will get a bit of power but not a lot.

Such a stake gives it the power to block a long-mooted full takeover offer for The Warehouse. It also goes a good way to getting the 25 per cent shareholder support Foodstuffs would need to block one of the newly fashionable mergers by scheme of arrangement.

But the stake is still not enough to prevent buyers such as Wal-Mart of the US or Britain's Tesco getting alongside founder Stephen Tindall, who controls 51 per cent of the shares.

In such a takeover, Foodstuffs would be left out in the cold.

The foreign buyer will not in the first instance control The Warehouse's cashflows. But it can install its systems in the knowledge that minority shareholders will eventually sell down.

Foodstuffs' planned $150 million investment is a lot to leave invested in a rival, especially one that is eating its lunch.

Finally, Foodstuffs managing director Tony Carter is transparent in his wish for talks on co-operation - presumably a joint venture. (Now is the time to do a such deal. A tie-up once The Warehouse has a stake in the grocery market is sure to be blocked by the Commerce Commission).

Bullying may help Foodstuffs' cause but not help much. The Warehouse would only pursue such a venture if it offered more than marginal value.

The alternative explanation for its behaviour is to view a 10 per cent stake as the starting point for a larger takeover bid. But there are grounds to dismiss this view.

Foodstuffs has not discussed taking a stake with Tindall. Carter is adamant the co-operative is not planning to buy more shares. For instance, he said it was unlikely it would lift its stake beyond 10 per cent within a year.

All of this is good news for shareholders. The Warehouse's strategy is making a competitor nervous, suggesting the discount retailer is on the right track. Its shares have soared and, what is more, the bid has highlighted The Warehouse's value to offshore buyers.