Beleaguered grocery wholesaler Metcash is diversifying into the car spare parts business to help bolster its bottom line and will undertake a $375 million capital raising to help pay for the new business.
Metcash on Thursday announced plans to acquire a 75 per cent controlling stake in Automotive Brands Group (ABG), the company behind the Autobarn and Autopro stores, for $53.8 million.
The purchase was announced on the same day that Metcash reported a 63 per cent slide in full year profit amid challenging conditions in the wholesale grocery market caused by the price war between Coles and Woolworths.
The grocery and liquor wholesaler reported a net profit of $90 million for the year to April 30, down from $241.4 million in the previous 12 months.
Chief executive Andrew Reitzer said while the company’s grocery business had performed well considering the tough economic climate, car parts retailers traditionally produced better results in hard times.
“When times are tougher people hold on to their cars for longer and then there is a need for car parts to fix them, to make them look better and keep them on the road for longer,” he said.
Mr Reitzer said ABG would fit well with Metcash’s hardware business the Mitre 10 Group, which it intends to move to 100 per cent control after announcing last week that it was buy the 50 per cent it doesn’t already own from existing franchisees.
Metcash is to raise as much as $375 million from existing shareholders to fund the ABG stake as well as the Mitre 10 buyout, expected to cost $80 million, and for other acquisitions and growth opportunities.
The funds would also be used to upgrade Metcash’s warehouse distribution systems.
Trading conditions over the previous 12 months had been challenging as Metcash had to contend with a marketing war between the two national grocery chains, which had squeezed margins and contributed to price deflation.
Mr Reitzer said people were now shopping more often but buying less and hunting for specials.
“They don’t come in and buy for two weeks,” he said.
While there were no category of groceries that were slowing down, during the current conditions customers were looking to treat themselves, he said.
“In our businesses the `lipstick effect’ is for confectionery and groceries,” he said.
“They’re doing very well.”
Underlying earnings of $451.2 million were three per cent up from the previous year, in line with Metcash’s previous guidance.
However, costs associated with its restructure, the acquisition of Franklins and an impairment on one of its businesses totalled $176.7 million.
Metcash bought Franklins in late 2011 for $215 million.
Metcash forecast underlying earnings per share growth of up to five per cent in 2012/13 and declared a final, fully franked dividend of 16.5 cents.
Metcash shares are in a trading halt and last traded at $3.74.
