ACCC gives Metcash a shot at Bunnings

A new Bunnings store in Ringwood. Picture: Christopher Chan.

The Australian Competition and Consumer Commission’s decision to clear the way for Metcash to bid for Woolworths’ Home Timber & Hardware should put Metcash in the box seat to acquire the business and emerge as a more serious challenger to Bunnings in the sector.

Metcash (MTS) is the natural acquirer of Home Timber & Hardware, given its existing presence in the sector through its Mitre 10 banner. It would emerge as the only full-service wholesaler of hardware as well as bulking up its retail presence.

There are other mooted bidders for the Home Timber business, with private equity player Anchorage Capital, two former key executives and Blackstone Group (also interested in the Masters business as a property play) the most often nominated.

It is the synergies from its increased clout with suppliers and the scale Metcash could achieve by bringing the two challenger brands together that ought, however, to enable it to outbid its rivals. While it would still be only a fraction of Bunnings’ size, it would be a stronger competitor than if the brands were separately owned.

The ACCC described its decision not to oppose Metcash’s participation in the bidding as “finely-balanced”. There had been some concerns among independent retailers that merging the two brands would leave them dependent on one wholesaler.

Metcash blunted those concerns by offering court-enforced undertakings not to restrict independent retailers from sourcing products elsewhere or favouring its own stores over nearby independents. The commission was also mindful that Bunnings near-ubiquitous presence would “indirectly constrain” Metcash’s wholesale operations.

There will be an independent auditor to monitor Metcash’s compliance with its undertakings and retailers trading under any of the banners it will control, including Mitre 10, would be able to leave the brands and establish themselves independently, potentially enabling the emergence of other wholesalers.

The sale of the profitable Home Timber is the “easy” part of the liquidation of the hardware and home improvement businesses launched by Woolworths and Lowe’s in 2009 in an attempt to challenge Bunnings at a point where Bunnings’ owner, Wesfarmers, was in the initial phase of renovating the then-struggling Coles, Kmart and Target businesses it had acquired in 2007.

The harder part will be dealing with the Masters business, in which Woolworths (two thirds) and Lowe’s (one third) have invested more than $3 billion, most of which has been lost.

When the closure of Masters was finally announced earlier this year, there was an expectation that Woolworths and its US partner would, under the terms of their agreement, negotiate a value for Lowe’s interest in the joint venture. That would have enabled Woolworths to take full control of the liquidation.

Unhappily, while Woolworths has said Lowe’s remains supportive of the sale process, the partners have been unable to agree a price for Lowe’s exit.

It is possible, albeit unlikely after the Woolworths and Lowe’s experience, that Masters could be sold intact to an aspiring new entrant into the home improvement sector. More likely is the sale of the underlying property portfolio and the liquidation of Masters’ stock. There are about 63 properties, 39 of them owned by the joint venture and the remainder leased.

The continued presence of Lowe’s and Woolworths’ obligations to its partner means the driver of the way Masters and its properties are dealt with has to be price alone.

There are a range of interested parties, local and offshore, interested in the Masters sites. Those nominated as Bunnings (which has said it is interested in about 15 sites), Harvey Norman, Super Retail, Costco, Ikea and South Africa’s Steinhoff.

Woolworths would be reluctant to see key sites go to any of the Wesfarmers brands (Kmart probably has its hands full with its integration with the troubled Target brand), which would strengthen its major competitor.

It would also, given it is trying to manage a turnaround of both its core supermarkets business and its Big W discount department store division, be sensitive about the potential of the process to give emerging competitors like Costco and Steinhoff a boost in a market where gaining control of big box format sites represents a significant obstacle to entry and expansion.

Given Lowe’s continued presence, however, Woolworths’ ability to factor its own strategic considerations into the Masters sale process is constrained and it may have to accept that the very costly failure of its hardware strategy may provide a leg-up to its ongoing competitors.