What's going on behind the shed

Stephen Tindall

Stephen Tindall and his plans to privatise The Warehouse Group have been left in the dust after Woolworths' swoop on shares last week gave it 10 per cent of the company.

Three weeks ago, Tindall said he would offer $5.75 a share, an offer that valued the company at $1.8 billion.

But after Woolworths' buy-in at a price valuing The Warehouse at $2 billion, Tindall is flanked by the grocery duopoly of Woolworths and Foodstuffs as he plans his own grocery business, The Warehouse Extra.

Warehouse shares were up 11c at $6.70 last night.

When Tindall announced his privatisation bid with Pacific Equity Partners last month, he said it was aimed partly at fast-tracking the expansion into groceries.

And he said he was privatising the company because the expansion involved too many risks for sharemarket investors.

But three weeks after Tindall announced the first part of his two-tier offer built around a basic offer of $5.75 a share, his proposal is looking like wishful thinking.

And while his 27 per cent share of the company he founded is worth a lot more than it was last month, some people believe the tide has turned for him.

With Foodstuffs and Woolworths each holding 10 per cent of The Warehouse Group, there are questions over whether Tindall can fast track The Warehouse Extra groceries plan.

And the standoff with the new shareholders raises the prospect of a takeover that would change The Warehouse and the New Zealand retail landscape.

Macquarie Bank analysts noted that the Woolworths purchase initially looked like a defensive move.

"But if Woolworths were able to purchase The Warehouse it could be a positive move, facilitating aggressive expansion of its food and non-food offer in New Zealand," they said.

Analysts at Goldman Sachs JB Were warned that The Warehouse situation could remain unresolved for a long time, during which its ownership would remain in limbo.

After the Woolworths buy-in, Tindall cancelled a meeting with The Warehouse Group board, and said he was considering his next move.

He and his wife Margaret then left for a holiday in the United Kingdom, leaving other Warehouse shareholders to ask: What happens next?

Could Stephen Tindall continue with his plan to privatise The Warehouse in a consortium with Pacific Equity Partners?

Can pigs fly? Even before Woolworths blew the lid off Tindall's offer, investors such as Rickey Ward of Tyndall Investments and some sharebrokers were looking askance at Tindall's two-tier offer and the lack of detail he was giving.

Said one broker: "Tindall seems to have been slow off the mark. Where was his $5.75 offer when Foodstuffs bought 10 per cent of shares in June for $5?

"Then they announce the privatisation plans with limited advice on structure. No wonder people jumped last week at Woolworths' straight $6.50 cash offer."

Under the effectively quashed Tindall proposal, most shareholders would have been offered about $5.75.

The Woolworths' buy-in appealed to the people who might be called the easy pickings.

To appeal to the rest, Tindall will have to offer more than the $6.50 a share Woolworths paid for its holding.

Why don't Tindall and PEP invite one of the grocery companies into the consortium?

Reaching an accommodation with one of the grocery giants makes sense if Tindall is intent on keeping alive his scheme of arrangement and continuing with his privatisation bid. Bringing Woolworths or Foodstuffs on board would make it easier for Tindall to reach his target of 75 per cent of shares to push through a scheme of arrangement.

It might also provide expertise for developing The Warehouse Extra.

Tower Asset Management portfolio manager Wayne Strechan believes Foodstuffs almost certainly bought its 10 per cent in July as a defensive gesture, but that Tindall might consider it for his privatisation consortium.

In part, that is because of Tindall's image as a fiercely nationalistic businessman and because Foodstuffs is a wholly New Zealand-owned federation of co-operatives.

Bosses of Australian-owned Woolworths phoned Tindall soon after the Foodstuffs buy-in in May, asking to talk but it is understood he was not interested.

Strechan believes Woolworths' motivation for last week's foray was also defensive, at least in part.

Can't Tindall just get used to the new status quo - flanked by Foodstuffs and Woolies?

Tindall could drop his privatisation plan. David Lane, head of research at sharebrokers UBS New Zealand, is one of those who do believe Tindall's suggestion that The Warehouse had to be privatised before its grocery business could be set up.

"With 10 per cent, the two corporations have no involvement in the operation of the company and would not have a place on the board," said Lane.

As another analyst said: "If you are [Warehouse chief executive] Ian Morrice, you work hard to make the company as strong as possible.

"If one of the shareholders does not like you going into groceries, they take their shares elsewhere."

But remaining on the stock market under that structure raises another question - how long would it be before someone made another offer for shares?

Tindall owns 27 per cent, and the Tindall Foundation is the next biggest shareholder with 21.7 per cent. Family interests take that combined shareholding to 51 per cent.

But some are raising questions about the solidity of that 51 per cent, which gives Tindal control of any change.

The foundation is a charitable trust purportedly independent from Tindall, although its trustees include his wife, and until recently, two directors of The Warehouse.

Supermarket wars are famously litigious, and some believe that should the Tindall Foundation refuse a higher offer than Tindall's, it might leave itself open to a legal challenge.

So The Warehouse could be sold off completely to the highest bidder?

Everything is for sale at the right price. But Tindall's image is so closely aligned to the Red Sheds that it would take some explaining if he took a big cash offer and walked out on The Warehouse.

Tindall has always insisted that he is a buyer of The Warehouse, not a seller.

He controls The Warehouse if the Tindall Foundation follows his lead. But at what point under the deed that governs it would the foundation have to consider a buy-out offer?

These are questions that would be debated if someone were to make a hostile takeover bid.

In any case, is Stephen Tindall committed to hanging on to The Warehouse at any price?

People are still trying to judge the motives of Woolworths. But on the face of it, Woolies, an aggressive acquirer listed on the Australian stock exchange, is the most likely buyer. It recently bought Progressive Enterprises for $2.66 billion and is in the middle of a transition phase linking its interests on both sides of the Tasman.

Its reputation is not one of being a defensive shareholder.

Buying The Warehouse Group makes sense, and not only because Woolworths would be able to block a new competitor in the grocery market and stop The Warehouse forming an alliance with Foodstuffs.

Its New Zealand assets, acquired through Progressive Enterprises, are focused on supermarkets - Foodtown, Countdown and Woolworths. It also owns Dick Smith Electronics in Australia and New Zealand.

It has little role in the general goods market dominated by The Warehouse, and has said it wants to expand its own Big W general goods chain.

But setting up Big W in New Zealand is limited by the scarcity of sites, and new retail developments face long, costly planning hearings.

By buying The Warehouse, Woolworths would instantly have 85 Red Sheds and 43 smaller Warehouse Stationery stores.

Would anybody else be interested?

The other most likely contender is Woolworths' competitor in Australia, Coles which owns K Mart in New Zealand. But it is busy fighting its own takeover offer, from KKR.

Retailing is becoming an international industry and the emerging ownership battle for The Warehouse is insignificant compared with changes by companies such as Walmart in the United States and Tesco in Britain.

Many analysts believe that even combined New Zealand and Australian retailers are too small to attract multi-national companies, though in Australia Woolworths is often mentioned as a potential takeover target.

But as Wayne Strechan of Tower says, "unusual things do happen".

"Four months ago, nobody would have dreamed of Foodstuffs being involved in The Warehouse, let alone that it would be joined by Woolworths - and that's the situation we are in now."


SHOPPING LIST

April 2005: Woolworths buys Progressive Enterprises from Foodland.

July 5, 2006: Foodstuffs gains a 10.1 per cent share of The Warehouse, mostly through a $5-a-share offer.

September 14, 2006: Stephen Tindall reveals a plan to privatise The Warehouse. It is built on a cash offer of $5.75 a share with Pacific Equity Partners.

September 27, 2006: Woolworths buys 10.1 per cent of The Warehouse, mostly through an overnight raid, with a cash offer of $6.50 a share.

September 29, 2006: Tindall goes on holiday, saying he is considering his next move.


STEPHEN TINDALL

Founder and majority shareholder of The Warehouse

Has 27 per cent of shares in The Warehouse, and is a trustee on the Tindall Foundation, a charitable trust that has 21.7 per cent.

An icon of New Zealand entrepreneurship, Tindall has been promoted as a fiercely nationalistic philanthropist.

The Warehouse Group includes 85 Red Shed stores and 43 Warehouse Stationery stores.

Its market capitalisation at the end of trading last night was $2.045 billion.

Sales for the year to June 2006: $1.72 billion, up 2.2 per cent on last year.

Net profit after tax: $96.9 million.

Big issue: Can Tindall, backed by Pacific Equity Partners, create a new competitor in the grocery market while flanked by the two players in the grocery duopoly? Can he rely on The Tindall Foundation to back his strategy to control its destiny?

Tindall has said that he is a buyer of Warehouse shares, not a seller.


TONY CARTER

Managing director, Foodstuffs New Zealand

Heads a federation of three grocery co-operatives based in Auckland, Wellington and Christchurch.

Formerly head of Foodstuffs South Island, Carter was appointed to head the group in July 2001.

Foodstuffs incorporates owner-operated supermarkets including 40 Pak 'n Save's, 139 New World supermarkets and five Write Price stores in Wellington. Also 299 Four Square stores and 170 On The Spot convenience stores in the South Island.

Annual group sales to February 2006: $3.1 billion, up $166 million or 5.7 per cent on 2005.

Profits distributed to members of co-operatives, $92.127 million, up 15 per cent on 2005.

Big issue: Foodstuffs' structure raises questions about its willingness and ability to ever launch a full-scale takeover for The Warehouse.

Carter has said Foodstuffs had bought its 10.1 per cent stake in The Warehouse on June 3 as a "strategic long-term investment" and is waiting to hear from Tindall when he has an offer for shares.


MICHAEL LUSCOMBE

Chief executive, Woolworths Australia

Newly appointed replacement to longtime chief executive Ron Corbett, who will remain a consultant reporting directly to the Woolworths board of directors.

The biggest Australian retailer, Woolworths operates almost 3000 stores in Australia and New Zealand with New Zealand interests obtained in April last year with the purchase of Progressive Enterprises. Major brands include Safeway, Caltex Woolworths Petrol, Dick Smith Electronics (transtasman), Tandy, BWS, Dan Murphy's, Big W.

In New Zealand its main brands are Foodtown, Woolworths, and Countdown.

90 per cent of shareholders hold 5000 shares or less.

ASX market capitalisation: A$24.76 billion.

Annual sales to June 2006: A$38 billion.Net profit after tax A$1.014 billion up from A$791.5 million.

Issues: Woolworths wants to expand into the general goods area dominated by The Warehouse and Tindall's plans to privatise the company could take it out of its reach.

Woolworths may have taken a defensive stake, but it has said nothing about its plans for The Warehouse.