Sue Mitchell
July 13, 2017
AFR
Metcash has knocked back a $25 million offer from plumbing supplies retailer Reece for Hardings Hardware and ruled out selling its company-owned hardware stores, despite pressure from independent retailers.
Metcash acquired Hardings Hardware last year as part of its $180 million purchase of Home Timber & Hardware from Woolworths. Woolworths’ Danks division had bought the former privately owned chain in 2013 to strengthen its hardware wholesaling operations.
It is understood that Reece offered about $25 million last month for Hardings, which has six outlets in Victoria, Queensland and South Australia and sells bathroom, kitchen and building products to the trade sector.
“It’s a bit like Reece without the fancy showrooms,” one source said.
Metcash chief executive Ian Morrice and Mitre 10 boss Mark Laidlaw turned down the unsolicited offer, telling Reece the price was too low and it was not ready to sell.
Analysts said the sale of Hardings would have dented Metcash sales and earnings, because the stores turn over about $100 million a year and are said to be profitable.
“It does phenomenally well,” one analyst said.
Metcash, which owns the IGA, Mitre10, Home Timber & Hardware and Cellarbrations banners and describes itself as the champion of independent retailers, is under pressure from Mitre 10 and HTH store owners to sell company-owned stores to avoid competing directly with independent retailers.
“They’re wholesalers and don’t really like to own their own stores,” one source sad. “They’re not good at running stores.”
Metcash declined to confirm if it had received an offer for Hardings, but doused hopes that it would at some stage sell company-owned hardware stores. Reece declined to comment.
“We have consistently said we are not looking to sell our company-owned stores in hardware,” a spokesman said on Thursday.
“We have made it clear when asked and in investor meetings that Hardings provides significant growth opportunities for the Independent Hardware Group going forward,” he said.
The HTH acquisition increased the number of company-owned and joint-venture (or partly owned) stores from 53 to 94, representing more than 10 per cent of the bannered Mitre 10 and HTH network.
Metcash also has equity stakes or joint ventures in a dozen IGA grocery stores, but its interests tend to be about 25 per cent, just enough to stop the stores being sold to Coles or Woolworths.
Independent retailers believe Metcash should focus on integrating the Mitre 10 and HTH wholesale operations, cutting costs and striking better deals with suppliers to achieve synergy targets of $15 million to $20 million.
However, analysts say Metcash has an opportunity to boost hardware earnings by lifting margins at company-owned stores, countering a decline in earnings from food and grocery distribution.
Hardware wholesaling margins are estimated to be 2.4 per cent, while retail margins are estimated to be 4.4 per cent.
UBS analyst Ben Gilbert believes Metcash has scope to lift retail margins, noting that retail margins are less than half those of market leader Bunnings, which is one of the most profitable home improvement retailers in the world.
“Every 50-basis-point increase to retail margin drives about 2 per cent net profit upside,” Mr Gilbert said in a report last month.
The HTH acquisition boosted Metcash’s hardware sales by $970 million to $2 billion and increased its share of the market to 5 per cent, making it the second-largest player in the $45 billion market after Bunnings.
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