Thursday, August 14, 2008

Warehouse appeal decision imminent

Since the decision by the Appeal Court to deny Foodstuffs and Woolworths Australia [WOW:ASX] the right to make a takeover for The Warehouse [WHS.NZX] we are half way along the 20 working day period for the appellants to take leave to appeal to the Supreme Court against the decision.

Investors in the company might be thinking a number of possible scenarios.

1. That no appeal will be made

2. That an appeal is taken and won or lost

3. If lost what the prospects are for the company in its current form

4. If won how much shareholders want for their shares

5. Will Stephen Tindall make another play at full private control of his company?

6. If either Foodstuffs/Woollies or the Commerce Commission lose in the Supreme Court will either seek a judicial review?

I'm guessing here but if either Foodstuffs or Woolworths was going to drop an appeal to the Supreme Court I think they would have come out already and put us all out of our collective misery. The fact that nearly ten working days have passed would indicate that lawyers from both companies, as well as The Warehouse itself, would be mulling over the Appeal Court ruling, looking for inconsistencies, mistakes and holes that they could drive a successful argument through in the Supreme Court.

I think there will be an appeal for those reasons.

At present the retail sector in New Zealand isn't looking too bright. Christmas 2008 shopping is looking dim and the prospect for a serious spending upswing isn't likely until well into 2009 in my opinion.

Never fear though!

As always with economics and the economy things do change and the retail sector will pick up and The Warehouse will be stacking up profits once again.

Where things will get really interesting is if Tindall or Foodstuffs/Woollies get control. We will likely see an expansion of the company towards larger format stores that stock more food items- a complete roll out of the "Extra" format in other words.

This is unlikely to happen under the current ownership, as the capital needed will be large and the deep pockets of an owner like Woolworths or a private partnership, along with Tindall will be able to modernise the chain with that big capital base behind them, with the ultimate benefit going to the consumer. This is where the Commerce Commission has erred in my opinion-a significant expansion of The Warehouse is only likely to happen if the company is able to be put up for sale.

The possibility that Stephen Tindall would make a play for full control is a likely one if all else fails. I don't think this can happen until after the tussle between Foodstuffs/Woollies and the Commerce Commission is resolved. It would be nice to see him own his baby outright again though. The question would then be how much would he offer to take control.

Some commentators have said Tindall wouldn't have to bid much higher than the current share price of a round $NZ3.50 per share. I think that is dreaming myself because Foodstuffs and Woolworths both have 10% holdings that cost them considerably more than that and would not accept anything less than what they paid.

Tindall would need the 20% sum of those two companies holdings to make a successful takeover and so the offer to all shareholders would have to be north of the $6.50 price that Woolworths bought their 10% for.

Woollies and Foodstuffs would clearly hold the upper hand in this position.

In the case of a competing bid for The Warehouse by Foodstuffs or Woollies should they ultimately be allowed to bid for the company, it is up to shareholders not to shortchange themselves. Tindall already owns about 53% of the company, so they need to grab his holding, the 10% either of the two bidders owns , so that would leave 27% of shareholders like myself to agree with the price the two big shareholders agree to sell for to take an offer to the 90% threshold and therefore compulsorily take the remaining 10%.

Of course everything could be left completely up in the air for another year or so, after waiting for a Supreme Court hearing, by a judicial review of a decision made in that court.

It has been done before by Foodstuffs in the case of Progressive Enterprises wanting to merge Foodtown's brands with Woolworths NZ in 2002. Woolworth's Australia then bought that merged entity in 2005.

Whatever the final outcome, investors can be sure there will be a considerable wait to get a final decision.

Disclosure: I own WHS shares

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