Market analysts consider the break-up of takeover target Foodland Associated even more likely after the release of interim profit results described as ‘weak’ and ‘poor’.
Market analysts consider the break-up of takeover target Foodland Associated even more likely after the release of interim profit results described as ‘weak’ and ‘poor’.
Morgan Stanley analyst Ron Sargeant summed up the general response by stating that the results were “more good news” for Foodland suitor Metcash Trading.
Analysts also agree that Metcash is likely to succeed with its takeover, first announced nearly four months ago, but they believe it may have to increase its current offer.
Foodland’s interim profit for the half-year to January was $53.2 million, down 32 per cent on the previous corresponding period but up 5.6 per cent if one-off items are excluded.
Merrill Lynch said in a research note the results “did nothing to inspire from an operational sense”.
Mr Sargeant took up this theme in his research report.
“The operational result was poor, and the outlook for both Australia and New Zealand was one of continued strong competition in supermarkets. The wholesale business has fared much better.”
The results prompted a range of earnings revisions.
ABN Amro took a positive view, saying it believes Foodland can continue to rebuild sales momentum in 2005.
In contrast, Credit Suisse First Boston has concluded that Foodland’s projection of a stronger second half “seems a touch optimistic”.
However most analysts believe the main driver of Foodland’s share price will not be its earnings but rather the takeover and likely demerger of its business.
If Metcash succeeds with its takeover, it plans to retain Foodland’s wholesale business but sell its Action supermarkets to independent buyers and re-list the New Zealand business.
Foodland initially criticised the concept of breaking up its business but has since changed its stance.
Early this month Foodland chairman Len Bleasel said the board had commenced a process to protect shareholders’ investment.
“One of the specific alternatives being implemented is a demerger of the Australian and New Zealand operations,” he said.
Merrill Lynch believes Metcash’s offer to re-list the NZ business and Foodland’s demerger proposals in the current forms are less than efficient outcomes.
“In our view, the best outcome for Foodland shareholders would be for a trade sale of NZ and a renegotiated deal for the Australian assets with Metcash.”
It suggests the NZ assets could fetch as much as $16-$20 a share, on top of the bid for the Australian assets, valued at between $7.18 (cash) and $7.98 (scrip).
As a result, it expects Foodland to trade in a range of $23 to $28 per share, compared with the current share price of about $25.20.
Credit Suisse First Boston is more cautious, because of the margin pressure experienced in the Progressive supermarket business in NZ.
“Although we expect Action to be successfully divested in a carve-up, Progressive’s performance may drive some caution on the price the majors are willing to pay for the asset,” the corporate adviser said.
JP Morgan is also cautious about the strategic value of the NZ assets to Foodland break-up potential bidders Woolworths and Coles Myer.
“We think much of this strategic value and control premium is already reflected in the [Foodland share] price,” the broking firm said in a research note.
UBS has a base case price target of $24.45 but believes Foodland could be worth as much as $27.67 if Woolworths and Coles Myer were to bid for the NZ assets and if Metcash were to increase the value of its offer for the Australian assets.
It said the latter may occur “as the Australian assets are in better shape than we thought”.
Mortan Stanley’s Mr Sargeant sees even more potential upside, estimating a break-up is worth a minimum of $26.14 per share and “possibly up toward $30 per share if certain assets are considered surplus and an optimistic approach is taken to NZ synergies and acquisition multiples”.
Metcash chief executive Andrew Reitzer said his company was addressing major concerns raised by Foodland about its proposal.
Metcash shareholders last week approved a scheme of arrangement and capital restructuring that meant the re-listing of the NZ assets was now “assured”.
Mr Reitzer said Metcash was also expecting a ruling from the Australian Taxation Office regarding the capital gains tax implications for Foodland shareholders.
DJ Carmichael analyst Wendy Chesson said Metcash was unlikely to budge from its current position.
