PFD Foods and Woolworths $552 deal will not hit competition: Richard Smith

The ACCC will decide on Woolworths buying 65pc of PFD Foods in a $552m deal by early December. Smith says the deal should be approved.

Richard Smith jokes it has taken him 60 years to build 11 per cent market share in the food services sector in Australia.

The figure belies the success his PFD Foods giant has become; he built a low-key family business into one with about $2bn in annual revenue and has just agreed to sell a 65 per cent stake to Woolworths.

It is a $552m deal struck in August that will see Woolworths make a big foray into the food services sector, the backbone of an industry delivering food to thousands of pubs, restaurants, bakery chains, fast food outlets, hotels, hospitals, retirement homes, prisons, airports and cruise liners around Australia.

As Kerry Smith, PFD’s chief executive and Smith’s daughter says: “Anywhere people do anything outside the home that involves eating, we are there.”

The Woolworths and PFD deal has attracted the attention of competition authorities, and the concern of competitors who fear the hit their businesses have taken during COVID-19 will be exacerbated by having a rival backed by a supermarket giant.

PFD is also a big supplier of frozen fish to Coles. It is a key contract for Smith’s company and one of the reasons he is insistent on explaining why the Australian Consumer & Competition Commission should approve the Woolworths sale.

In rare interview, Smith tells The Weekend Australian it is the right time to sell down what is one of the country’s quiet success stories, which started with him taking a driver’s job at 19 just after emigrating to Australia, working his way up the ranks to eventually own the company and then building it into a $2bn giant.

Yet even at that size, Smith says PFD is hardly a dominant player in a still fragmented and competitive sector. And he insists there will be safeguards in place in the form of an information “firewall” to protect longstanding customers like Coles from Woolworths.

“They’re inferring and claiming our market share is about 40 per cent, which is totally wrong, and making the claim with Woolies on board we would become a monopoly,” Smith says of those opposed to the deal.

“But I’ve been in the business 60 years, 25 years as an owner, and it has taken me that long — and that’s buying a lot of companies along the way — to get to an 11 per cent share.

“There’s certainly going to be some benefits but you can’t imagine them coming along and taking a huge share in the market all of a sudden. It won’t happen. And we are not going to treat our customers any different to what we do today.”

Woolworths has agreed to buy 65 per cent of PFD for $302m and 26 distribution centres for $249m. PFD management will remain in place and the Smith family can sell the remaining 35 per cent to Woolworths in three years under a put and call agreement.

It is obviously in Smith’s interest that the deal goes though, with the ACCC set to announce its decision on December 10. But in an industry estimated to be worth $18bn or more, he says only PFD and rival Bidfoods would likely have market shares of more than 10 per cent.

PFD will also need to allay the concerns of existing customers such as Coles. Kerry Smith says Woolworths will not have access to any information about their supermarket rivals as there will be a restrictive “firewall” in place.

“There are certain customers, Coles being one of them, that their information will not be passed on to Woolworths. Woolworths have agreed to this. They don’t see any strategic information and we will absolutely ensure that occurs.

“Most (customers) are being very supportive and we will continue to service them as we have for a very long time, give them the protection of that firewall, and we’ve said, ‘You’ve trusted us for this long, so let us prove it to you that it will work by how we behave in the future.’ That is all we can do, because they have alternatives. Every customer has an alternative so we have to make sure they stick with us.”

Richard Smith says PFD for many years had fielded inquiries for private equity firms to sell all or part of the company, and first discussed a deal with Woolworths when the supermarket giant tried to sell its petrol business to BP for $1.8bn, which was blocked by the ACCC in 2018.

Woolworths and PFD stayed in touch and Smith says he was impressed when meeting CEO Brad Banducci by the terms of the 65 per cent deal, which is similar to that Woolworths had with Smith’s great friend and fellow member of The List — Australia’s Richest 250, Bruce Mathieson, who has long owned the ALH pub business with Woolworths.

“Probably in the last 12 months and I turned 80 and thought it was time to have another look. We started talking to them just before last Christmas and when COVID hit I thought what we are trying to do is the best thing to do,” says Smith.

“We’ve still got 35 per cent and they’ve given us assurance they are quite happy with the management team and they won’t try to inflict any of their terms and so on on any of our suppliers and they will virtually be hands-off.”

It is all a far cry from when, aged 19, Smith emigrated from Dundee in Scotland in 1959, where he had left school at 14 with the words his rector said — “Maybe it is a good idea, Smith, if you left” — ringing in his ears.

Smith worked as a van boy helping sell soft drinks, then later as salesman and driver. He would later in his teenage years follow his fiance’s family to Australia, move to rural Victoria and start working for a local food delivery business in Morwell called Processed Food Distributions.

It was a stroke of fortune given the original plan was for the family to move to Dalby in Queensland, but finding it too hot they moved to the Latrobe Valley instead. Smith worked his way up to manager of the branch and then in 1968 moved as sales manager to its Melbourne headquarters.

In 1975 parent company Irvin & Johnson decided to sell, and mostly with the help of the wealthy Liberman family, which owned the Half-Case Warehouse business PFD supplied, Smith engineered a management buyout by using the $20,000 long-service leave and superannuation I&J had paid him.

Thirteen years later, the Libermans sold their share to Smith who assumed full control and set about building a national network of warehouses and trucks, making a series of bolt-on acquisitions across the country. The group now has 2700 employees. Kerry Smith is the CEO, son Lindsay heads other joint ventures and businesses the family owns and another daughter, Sharon Landy, looks after their philanthropic pursuits.

Smith says the reliability of the group has been his primary concern.

“I always remember one of the famous national chefs, when we said we couldn’t supply something and said we can give you a credit note. He shot back and said ‘you can’t cook a f..king credit note’. I’ve never forgotten that.

“When you look at food service, it is a simple business: you buy it, you sell it, you make a profit.”