Updates: Metcash Wins Franklins, Raises Dividend And Full Year Guidance

A big day for Metcash yesterday, with a reasonable and a convincing win over the ACCC on its $200 million takeover of the Franklins supermarket chain in NSW.

Metcash is Australia's third player in the grocery and supermarkets businesses and it kicked off the day yesterday by lifting its full year earnings guidance despite reporting a 14% fall in first half profit yesterday.

In the afternoon it won in the Full federal Court which rejected an appeal by the ACCC against a lower court decision giving Metcash the greenlight to buy Franklins.

The buy will add more than half a billion in annual sales to Metcash's $6 billion and more of wholesale turnover in groceries, fresh food, liquor and hardware.

Metcash reported a $94.4 million net profit for the six months to October 31, down from $110 million in the previous corresponding period.

Revenue in the first half of $6.08 billion was up 1.7% from the previous corresponding period.

Earnings before interest, tax, depreciation and amortisation (EBITDA) rose 2.2% from the same period last year to $203.7 million.

The company said, "The growth in EBITA was posted despite persistent tough trading conditions, price deflation in most product categories and sustained marketing campaigns being run by the major self supply chains".

And Metcash declared an interim dividend of 11.5c fully franked, up from 11c a share paid for the first half of the 2010-11 financial year.

In an outlook statement published with the results yesterday, the company said:

"Management and the Board are pleased with the results given the value conscious consumer, marketing campaigns by the self supply chains and the unstable economic conditions.

"Management remains focused on growing the group's businesses and implementing initiatives to reduce costs.

"The Board upgraded guidance for the full year of low to mid single digit growth in underlying earnings per share."

But the company and CEO Andrew Reitzer acknowledged that trading conditions are still tough.

"We continue to face price deflation across a range of categories," Mr Reitzer said in yesterday's statement.

"There is no doubt that consumers are remaining price conscious in such an uncertain economic climate."

Metcash bought 80 Franklins supermarkets earlier this year for a total of $190 million after a bitter fight with the competition regulator the ACCC which ended up in the High Court.

The purchase and legal activity saw Metcash incur $14.6 million in costs in the six months to September, which helped depress first half net profit.

In comments to the media yesterday afternoon Mr Reitzer bought into the controversy caused by Coles and Woolies pushing more of their own brands at the expense of popular branded food products from outside suppliers.

Metcash, he said, has declared itself the "champion" of brands, and will distance itself from Coles and Woolies private label push.

"We believe Aussie consumers trust brands," Metcash chief executive Andrew Reitzer said. "What we prefer to do and specifically as a result of our two competitors new strategy is that we want to remain the champion of trusted brands.

"And you will be seeing in IGA catalogues going forward, and in media and television really big emphasis on trusting the brands that you know."

Metcash issued a statement yesterday afternoon after the win in the Full Court of the Federal Court regarding Metcash's acquisition of shares in Interfrank Group Holdings, the owner of the Franklins chain of supermarkets, from Pick n Pay Retailers.

The ACCC had appealed the earlier Federal Court judgment of Justice Emmett, refusing the ACCC's application to stop Metcash from acquiring the Interfrank shares.

The Full Court dismissed the ACCC's appeal and ordered that the ACCC pay Metcash's legal costs.

The Interfrank shares were acquired by Metcash on 30 September 2011 following Justice Emmett's judgment. Metcash is now seeking expressions of interest for the purchase of the 80 Franklins Supermarkets across Sydney and regional NSW.

Mr Reitzer said, "We will continue the process of seeking and reviewing expressions of interest for the stores, which are being sold to independent retailers".

Earlier in its profit statement, Metcash said that it paid $189.3 million for Franklins.

"At the date of acquisition, Franklins had bank debt of $30.3 million, which implies an enterprise value of $219.6 million for the business.

"The purchase price and subsequent repayment of the Franklins bank debt has been funded through Metcash's existing bank facilities.

"The addition of the Franklins stores has seen Metcash's grocery market share in NSW rise from approximately 11 percent to around 17 percent and has added $450 - $500 million per annum of wholesale sales to Metcash's business."

Metcash said it had started three work streams in its approach to Franklins.

The first was to fix the business with a good senior management team, and increase supplier support to rebuild the business.

The second was to introduce world class supply chain systems utilising fresh produce distribution from Metcash's existing systems; frozen, chilled and dry goods to come from the new Huntingwood (western Sydney) facility in 2012.

Thirdly, sell the stores. The final stages of the sales process are being completed with the last stores expected to be handed to independent retailers in 2012.

Metcash shares rose 6c to $4.03 yesterday in a market that drifted for much of the day.