Thursday, November 22, 2007

Border's decision an indicator for Warehouse takeover outcome

A very interesting decision by the NZ Commerce Commission on Tuesday to give Whitcoulls the go ahead to buy the Borders book chains in New Zealand and Australia.


http://www.aucklanddailyphoto.com/wp-content/uploads/2007/04/a24042007.jpg
Border's Auckland Queen St Store

Given this outcome one could be forgiven for not thinking that either Foodstuffs or Woolworths should be able to get similar approval to buy The Warehouse chain. when a decision in the appeal to the High Court comes to light.

The approval for Whitcoulls to buy the 5 store chain in NZ is a similar scenario to the possible Warehouse buyout.

In Whitcoulls you have a dominant player wanting to takeover the superstore format that Borders is modelled on even before it has been given a chance to flourish under another independent player. Paper Plus is another dominant NZ player that is also interested. Dymocks, with quite large format stores and a much NZ smaller business has dropped out of the running for some reason.

Dymocks would have been the natural partner for Borders in NZ simply because of its small size.

As has been covered ad nauseum, Foodstuffs and Woolworths twin bids for The Warehouse are being made by two dominant grocery players in New Zealand and the Warehouse has recently kicked off development of a superstore format along the lines of Walmart's "supercenters" that include grocery lines and with three of these stores the format is in its infancy.

In Auckland City CBD the purchase of Borders by Whitcoulls will allow the combo company almost a monopoly in the superstore format, with the Whitcoulls store only a block away from Borders, you will see price rises for stock. In the rest of the country Whitcoulls and Paper Plus dominate the book and stationery industry.

If you use the CC rationale for allowing a Whitcoulls or Paperplus buyout of Borders and apply it to a possible Warehouse takeover by two dominant grocery players the similarities are spookily parallel ones. The Warehouse extra format is in its infancy, as is the Border's format and allowing Foodstuffs or Woolworths to purchase would by the CCs own standards be acceptable.

The nub of the Commerce Commissions argument in the Borders case seems to be that their large format stores don't lessen competition in the hands of a dominant player, so the same measuring stick must be applied in the Warehouse decision before the High Court. Extra format stores are unlikely to be a threat to other competition if purchased by a dominant player if you apply the Borders decision or they cant be much of a threat in themselves as a successful format in anyones hands. Therefore a positive outcome must be applied otherwise consistency in decisions at the Commission will be threatened.

The wait and outcome will be interesting and the High Court have a tough decision to make. However, they must apply the same rules to the Warehouse decision as the Commerce Commission have made this week in regard to Borders.

Disclosure: I own Warehouse shares

C Share Investor 2007