AUSTRALIA APPROVES SALE OF FRANKLINS

ARTHUR HAGOPIAN

SYDNEY, Australia (FNS) -- The Australian Competition and Consumer Commission here said last week it has reached an in-principle agreement with Hong Kong-based Dairy Farm for the sale of the 287 supermarkets in its Franklins' supermarket chain.

Ross Jones, ACCC commissioner for mergers and acquisitions, said the package to which the ACCC has agreed involves the sale of 200 stores to independent retailers, and a maximum of 67 stores to Woolworths.

Independents will be offered approximately two-thirds of the total sales value of the Franklins stores.

The package facilitates the entry of two new players into the eastern Australian supermarket industry. Foodland Associated Ltd (FAL), an established supermarket operator in Western Australia and New Zealand, will acquire 35 supermarkets in Queensland and northern New South Wales.

Another 51 to 60 stores in NSW will be sold to a large overseas supermarket operator, which was not named, capitalized at more than $685 million.

There will be a further 112 stores sold through the Joint Independent Divestiture Alliance between Franklins and Metcash (formerly Davids).

The JIDA will assist in the sale of Franklins stores to independent retailers in NSW, Victoria, Queensland and South Australia.

"The ACCC's approval of this deal is conditional on the parties to the acquisition providing the ACCC with legally enforceable undertakings that ensure that the stores that are designated to independents in the package are ultimately transferred to them," Jones said.

Woolworths will only be able to use its discount "No Frills" product brand name and the "Franklins" trade names for a transitional period.

"The arrangement provides a major boost to the market share of independent grocery retailers in Australia and provides a strong third force in the supermarket industry sufficient to counter concerns expressed over the strength of the major chains," Jones said.

He indicated that in reaching this in-principle agreement, the ACCC accepted that the Franklins business is in rapid decline, and that the withdrawal of key stakeholder support was imminent. The ACCC was concerned that an uncontrolled collapse of the chain would see many more stores go to the major supermarket chains, with fewer stores available for independents and new entrants than is the case under the current proposal, he added.

"ACCC approval is conditional on receiving acceptable legally enforceable undertakings for the divestiture of a number of Woolworths stores to address local competition concerns," Jones pointed out.

He revealed that the ACCC considered a number of other proposals put forward by Dairy Farm. In January, Dairy Farm and Woolworths put forward a confidential proposal under which Woolworths would acquire 133 stores. The ACCC expressed competition concerns in relation to this package, and the offers were subsequently withdrawn.

"The current package sees the number of supermarkets to be offered to Woolworths scaled back considerably from previous proposals. The number of stores offered to Woolworths has been halved from the proposal put forward by the parties in January," Jones said.

Foodland Associated said the 35 Franklins supermarkets it will be acquiring were carefully selected from a portfolio of approximately 45 stores initially offered to the company.

The company is also engaged in preliminary negotiations for the acquisition of some of Franklins' Brisbane, Australia-based distribution assets, according to group managing director Trevor Coates.

The total cost of the company's investment, excluding working capital, will approximate $79 million, and the store portfolio will initially have annual sales exceeding $264 million.

"The size of the store portfolio we intend to acquire will establish FAL supermarket operations of approximately the same size as FAL's Action supermarket division in Western Australia," Coates said.

He noted that while the company was prepared to take additional stores, the sites it has been allocated will provide a solid platform on which to base expanding operations.

"Our only regret is that we were not offered the opportunity to purchase other stores within Franklins' Queensland portfolio," he said. "We intend to compete for new sites as they become available and will work with landlords to optimize the value of their premises.

"We are satisfied that the price we have negotiated for the store network is reasonable. The acquisition presents significant opportunities to extract synergy benefits, particularly in buying, merchandising and information technology across all our Australasian operations.

"We are confident that our entry into the marketplace will present our customers with a highly competitive offer and our suppliers with alternate points of sale for their merchandise, which might otherwise have been denied them."

Roger Corbett, Woolworths' chief executive officer, said his company was pleased to have been given the opportunity to further improve competition in the areas in which each of the 67 stores to be acquired are located.

"We expect to invest a considerable amount in upgrading these stores and in improving the range, quality and price offer to customers in these stores," he said.

The acquisition will lift Woolworths' share of the Australian food, liquor and grocery market by approximately 1.9% to 26.5%.

Yet, "this is still low, by world standards," Corbett said.

The acquisition will also "provide the certainty of employment for approximately 7,000 existing Franklins employees and enable them to enjoy the tremendous opportunities for increased career development as part of the Woolworths team," he added.