Metcash buys Franklins supermarkets

Posted by Nicole Eckersley on 1st July 2010

Franklins supermarketDiscount supermarket chain Franklins has been acquired by its former wholesale supplier, Metcash Trading Ltd, in an unsolicited $215 million offer to its current owner, South African chain Pick n Pay.

The sale, pending approval from the ACCC, will also bring to an end all current litigation between the two groups. Franklins won a legal stoush with Metcash over discounted wholesale prices in December 2009.

Metcash will acquire the company’s 85 supermarkets, including 77 corporate outlets and supply to 8 franchised locations, with a view to selling them to independent IGA retailers. In the meantime, Metcash will operate the Franklins stores.

“The IGA network will significantly improve its competitive position against the national chains in Australia’s largest grocery market, NSW, while growing the market share of Metcash supplied retailers in the state from 11% to 17%,” said Metcash Chief Executive Andrew Reitzer.

The offer to Pick n Pay by Metcash was timely. A strategic review by Pick n Pay was considering the options for Franklins: growing organically, expanding with the assistance of private equity, or exiting the business entirely. Franklins had already approached two private equity firms when the Metcash offer landed on the table.

“While we carefully considered all options during our strategic review, the Board felt that the Franklins business had not yet achieved critical mass and the decision was made to find an investment partner or purchaser for the business. The unsolicited offer from Metcash at a compelling price, which reflects the greater strategic value of Franklins to Metcash than under Pick n Pay’s ownership, was then received and accepted,” said Pick n Pay Chairman Gareth Ackerman.

“We’re willing to consider any asset sale as long as the price is right,” he said.

Pick n Pay bought 50 Franklins stores in 2001 from Dairy Farm International Holdings Ltd, with some stores also going to Coles and Woolworths. The brand now operates 85 outlets in NSW, including 19 former Fresco supermarkets, and employs around 5000 people.

Ackerman said the Franklins business had finally turned a profit in the last year.

“Since we bought Franklins in 2001, we have invested in the business and turned the loss making operation profitable, introduced franchising, developed a very successful loyalty programme and made other major structural changes which have significantly improved its performance.”

Despite this, Ackerman said that Pick n Pay would not be pocketing a huge overall profit from the $215 million sale after their investments in the Franklins brand.

“Put it this way: we’re not walking away with a huge profit – we’ll be lucky to get our capital back,” he said.

The sale will end Pick n Pay’s presence in the Australian market, with the company planning to focus its efforts on more favourable markets, including the “largely untapped” market of southern Africa.

“We want to focus on areas where we can achieve greater critical mass – the Australian market is dominated by two major players, and we’ve been unable to get a foothold, particularly in NSW,” said Ackerman.