'Yellow Sheds' sale tipped to cost $200m

Withdrawing from the Australian market could cost The Warehouse about $200 million on their investment, say analysts.

ABN Amro estimates the company has invested about $300 million in its 124 Yellow Sheds since it crossed the Tasman five years ago.

Speculation suggests it could now be ready to cut its losses and sell what last year turned into a $35 million deficit, with the investment bank saying the figure recouped could well be a 66 per cent loss on its investment.

"Our view is if they can sell it as a going concern, and they can sell it for around $100 million, it will be a good result for them," ABN Amro analyst Matt Willis said.

In June, The Warehouse said it was looking to merge its troublesome Sheds with Australian retail chain Millers' Crazy Clarks and Go-Lo outlets.

The company's group profit of $61.2 million last year was restricted by a $35 million loss in Australia.

Shares in the discount retailer have since rallied above $4 - to a five-month high of $4.03 - on speculation the merger will lead to a joint sale. They closed down 2c to $3.93 on Wednesday.

The enlarged merged business would generate sales of about $1.42 billion and have a market share of 14 per cent, making it more competitive against the dominant Australian players, Coles and Woolworths.

It would also be a more attractive sale target, with private equity firms Allco Equity Partners, Castle Harlan Australian Mezzanine Partners, Archer Capital and Catalyst rumoured to be mulling a joint bid worth about A$200 million ($220 million).

Brokers view the likely sale as positive because the operations - which have been tipped to break even by 2007 - have been a huge drain on cashflow and profits.

ABN Amro estimates offloading the Sheds would lead to a drop in capital expenditure of about $49 million over the next three years, while increasing earnings.

- NZPA