Depending on your point of view, Australian retailing has lost or gained a competitive force with the South African-controlled Franklins chain selling out to the formerly South African-owned Metcash.

Metcash announced yesterday that it was paying $215 million for all Franklins chain of 85 supermarkets, (which is made up of 77 company-owned shops and supply agreements with 8 franchised stores) in NSW.

The deal will add half a billion dollars a year to Metcash's sales which totalled $11.6 billion in the year to April, 2010.

It will see Metcash's share of the NSW grocery market rise from 11% to 17%, as a result.

One competitor at the retail level will be lost (which should worry the ACCC), but another in Metcash, will be strengthened with more outlets and higher turnover (and the ability to extract improved trading terms from manufacturers and suppliers).

Metcash said the deal would be achieved by acquiring the shares of Interfrank Group Holdings Pty Ltd, the company which owns the Franklins business, from Pick n Pay of South Africa. (Metcash used to be controlled by a rival South African retailer, the Metro chain).

The deal is expected to be finalised and completed by 30 September, 2010.

The transaction is subject to, among other things, ACCC approval and will be funded from existing Metcash bank facilities, Metcash said.

That means the company won't be asking shareholders for help, which will keep the share price high.

It's also an interesting sign that the banks are prepared to lend for deals like this at a time when there's some sluggishness in retailing and in the economy generally.

"In keeping with its core value of championing its independent retailer customers, Metcash proposes to implement a store sale program upon completion to sell the stores to independent IGA retailers," Metcash said in yesterday's statement.

"Metcash will operate the stores in the intervening period whilst the store sale program is completed, which could take several months.

Metcash Chief Executive, Mr Andrew Reitzer, said "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 per cent to 17 per cent.

"Metcash expects the independent retailers who purchase the stores will lift each store's performance through the successful combination of their own retailing expertise and through utilising the strength, services and support provided by Metcash; especially our national buying power, world class supply chain and marketing and merchandising programs.

"These stores will be able to take advantage of our favourable arrangements with suppliers to achieve more competitive pricing deals. Consumers and independent retailers in NSW are big winners from this deal," he added.

"The acquisition is expected to add more than $500 million per annum of wholesale sales to Metcash's business.

"The uplift in the first full year after selling the stores is expected to be between 1.5 cents and 2.0 cents per share."

The market gave Metcash the thumbs up for the proposed deal, with the shares jumping 3%, or 13c to $4.32, the highest they have been since late January.