Private equity play for The Warehouse: bold move or last resort?

Wednesday, 24 July 2024

ANALYSIS: In recent weeks announcements by The Warehouse Group have raised more questions than given answers, but its latest market update could explain all.

The company could be set to return to private ownership and delist from the NZX if a takeover proposal to acquire all shares by Australian private equity firm Adamantem Capital, at a price of $1.50 to $1.70 a piece, is approved by shareholders.

That values the Warehouse Group at between $520.2 million and $589.6m. Its current market cap is $500m.

Many New Zealanders see the Warehouse as a household name, a nostalgic national treasure of sorts. So quintessentially Kiwi that it must be public, right?

But it could be in the company’s best interests that it’s not.

New Zealand’s largest retail group by store footprint has been battling a tumultuous market post-pandemic. Most retailers have felt the crunch amid high interest rates and a steep pull back in consumer spending, but few more so than the troubled retailer once considered a market darling.

The company is not only juggling falling sales and declines in its profitability, but also a loss of market share to its arch rival Kmart, what some would call ‘lack of direction’ and weighing up the possibility of re-strategising to go all in on food retailing.

Not to mention it still has no permanent CEO after long time group chief executive Nick Grayston left abruptly in May. The group is currently restructuring to cut costs in its Auckland head office, after a rejig of its leadership team in June.

Its ecommerce start up TheMarket.com launched in 2019 but failed. Outdoor equipment retailer Torpedo7 flopped and the group was left little choice but to flick it off for a mere $1.

It has proven hard to be a generalist merchandise retailer in modern day New Zealand. And that has been reflected in the group’s share price.

The Warehouse might be the place where everyone gets a bargain, but what if the products it sells and the shopping experience it offers is no longer what the consumer wants?

That is something both management and analysts have been pondering. The group is now bracing for a further decline in earnings.

It expects its 2024 full year earnings to be 6% to 7% lower than last year, with earnings before interest and tax to be in the range of $22m to $30m, compared to $83.4m in the prior year.

That comes after it posted a $23.7m net loss for the first half of the year to January 28, which included the impairment of the Torpedo7 assets and restructuring costs.

With news of Warehouse founder Sir Stephen Tindall supporting Adamantem Capital’s takeover bid, and his own ability to reinvest in the company, it begs the question: is taking the group private a good move — or a last resort?

Analysts are torn.

A food play?

Tindall, who together with the Tindall Foundation owns about 50% of the group, has institutional knowledge that could be of significant benefit to Adamantem. The Warehouse previously thrived under his leadership, and the question many will be asking is just how much sway and input he will have on any new direction the company takes.

Taking the company private again will give the group freedom from shareholder scrutiny and the pressures of public regular earnings reports to more aggressively pursue grocery retailing as it wishes.

Tindall and Adamantem obviously see more value in the group than the market is reflecting.

It isn’t the first time that Tindall has tried to privatise The Warehouse, which he previously attempted in a bid funded by Pacific Equity Partners in 2006. Adamantem was founded in 2016 by former PEP execs Anthony Kerwick and Rob Koczkar.

Adamantem has a portfolio of New Zealand and Australian business, including Canterbury-based small goods brand Hellers, which could have been identified as a synergy between the two companies.

The Australian reported Tindall has aspirations for The Warehouse to become a third supermarket to take on an industry dominated by Foodstuffs and Woolworths.

The group has already done a lot of the ground work to pursue that goal (and has experience from a failed attempt from 2006-2009), including establishing deals with suppliers across a wide range of products including fresh produce, frozen foods and everyday staples such a milk, eggs and bread.

It has a growing range of 9000 pantry items under its private label brand The Market Kitchen, which it launched in 2021.

That, coupled with the physical scale of the Warehouse with its 88 stores, could give the retailer the competitive edge needed to take on the duopoly. The move would likely be welcomed by the government and grocery commissioner Pierre Van Heerden as they encourage more competition to help bring down food prices.

Former chief executive Nick Grayston has previously said the group believes it could make essentials at least 25% cheaper than what is available elsewhere in the market.

Grocery sales for The Warehouse have been strong in recent years amid high inflation and the cost of living crisis, and steadily growing since it revisited the category around 2020.

Grocery sales at the red shed now make up about 20% of total sales and counting.

It will be interesting to see what happens next, and whether this proposal, if approved, will set the direction for the group’s next 42 years in business.