Pick n Pay's Australian deal comes to a head

More than a year after announcing its intention to exit Australia, Pick n Pay's presence remains down under, through its 80 corporate owned and eight franchised Franklins supermarkets.

Metcash is Australia's largest wholesaling and distribution company servicing independent grocery retailers throughout Australia, including those under the IGA and Supa IGA banners.

After failing to gain sufficient scale in the Australian retail environment, which is dominated by Coles and Woolworths analysts lauded the South African retailer's decision in July last year to quit the market.

Given the sale, the group would have little or no need to borrow money for its plans to refurbish and open new stores, and ramp up its centralised distribution in SA.

"Distribution centres will deliver a far greater return than Franklins ever could," one analyst noted.

But in September, the month Pick n Pay had hoped to conclude the deal, the Australian competition watchdog said it sought more information on the sale.

The ACCC eventually opposed the deal, citing concerns about the effect it would have on wholesale grocery distribution in New South Wales.

Furthermore, the ACCC said there were other parties that would not raise the same competition concerns as Metcash which had "expressed strong interest in acquiring the entire Franklins business".

Pick n Pay, however, said it was surprised by the ACCC placing any weight in its decision on unnamed parties and it had not received any credible bids for the entity as a whole.

The opposition also prompted Pick n Pay to announce a less-favourable, but possible alternative exit strategy - selling its stores in a costly and long-drawn out piecemeal basis.

"They put Franklins on the block and now it's a bit of a forced sale. What they needed was a smooth quick deal, it's a headache that just doesn't seem to be going away for them," another analyst said.

In the months that followed, Metcash extended its cut-off date in relation to the sale twice, as the companies awaited judgment from the Federal Court.

Finally, the Australian court in August last month overruled the ACCC's bid to prevent the sale, clearing the way for the companies to proceed.

Justice Arthur Emmett said he was not persuaded that there was a separate market for the wholesale supply to independent supermarket retailers of packaged groceries, as the commission defined in its claim.

"The commission has based its case solely on there being a separate market for the wholesale supply to independent retailers of packaged groceries, as defined. The commission's pleaded case as to market definition has not been made out," Emmett ruled.

However, victory was short-lived, as the ACCC appealed the court's call.

Earlier this week, Pick n Pay said it was "deeply disappointed" about the appeal, but it welcomed Metcash's swift move to notify the ACCC that in five days it would press on with the deal.

The Australian regulator has applied for an interim injunction pending its full court appeal, and on Thursday, Justice Peter Jacobson will hear the matter and decide if the deal can be completed.

Proceeding with the deal ahead of a final appeal court decision would be risky for Pick n Pay and Metcash given the potential requirement to unwind the transaction, but Thursday's hearing could give the companies an opportunity to push for an expedited timetable for the ACCC's appeal.

A protracted appeal process is likely to have a strongly negative impact on Franklins' already weakened financial position, which has deteriorated after ruthless targeting by other major supermarket chains and the weak consumer environment.

"We remain very concerned about the impact this is having on the Franklins business and particularly our employees, and we would hope to have the issue concluded in the shortest possible timeframe," Pick n Pay chairman Gareth Ackerman said.