KEY POINTS:
Warehouse shares surged yesterday on the prospect of a speedy resumption in takeover activity following the decision to abandon grocery retailing.
The dropping of the Extra format saw Warehouse shares soar as much as 51c - 16.5 per cent - before easing back slightly to close at $3.49, up 40c or 12.9 per cent.
Extra's abandonment removes the key plank in the Commerce Commission's opposition to supermarket chains Woolworths and Foodstuffs mounting full takeover bids for The Warehouse.
"Well and truly is the M&A story back on the table," said Mark Lister, head of research at ABN Amro Craigs.
The Warehouse had signalled last month that it could pull the pin on Extra following a tailing off in its vaunted "halo effect" over the latter part of its financial year.
A halo - where grocery customers increase foot traffic and subsequently sales of general goods - had begun to emerge at the retailer's Whangarei store this year, giving the commission ammunition to successfully argue against the High Court decision allowing the supermarkets to bid for The Warehouse.
Chairman Keith Smith said yesterday that the Extra format simply was not going to achieve its three-year target of a 10 per cent halo benefit in general merchandise and apparel sales.
Instead, the three Extra stores were only experiencing a halo lift of between 2 and 2.5 per cent for the 2008 financial year.
Smith said the decision was not related to the ongoing takeover interest.
"We have, since we started Extra, said that it's under continual review every six months. This is a business decision that we've made."
Buddle Findlay senior associate Susie Kilty said the development bode well for the supermarkets.
"The barriers for Woolworths and for Foodstuffs to acquire The Warehouse have definitely diminished."
Kilty said there was still a risk the commission could fight any bid by the supermarkets on grounds that The Warehouse could be a future player in grocery retailing.
"The Warehouse would remain a near-entrant, so a third party could acquire all the Warehouse stores, which could give them immediate scale or scope to launch a new supermarket in New Zealand."
James Craig, senior associate at Simpson Grierson, said the commission could also make a point of the retailer's timing.
"They may query whether The Warehouse would in fact have abandoned the Extra concept if it were not for the proposed acquisition by the supermarkets."
The Commerce Commission did not want to comment, citing the ongoing legal process.
Lister said the development meant both suitors were likely to be reviewing their options. While growth in retailing looked likely to remain limp in the near term, The Warehouse remained an attractive target, particularly for Woolworths.
But crucial to any takeover is founder Stephen Tindall, who controls 53 per cent.
One market commentator said Tindall, who built the company from one Auckland store in 1982, would have high price expectations, despite the stock's current historical rock bottom levels.
Tindall's 2006 plans to reprivatise the company have also gained further currency given the stock's plummeting price in the past year's weak market. Lister said that remained a distinct possibility.
"I suppose in this market, teaming with private equity or another player is more difficult, and there's possibly more value in The Warehouse for someone who's got an existing similar business, like a Woolworths or a Foodstuffs."
Foodstuffs managing director Tony Carter did not rule out making a bid.
"We'll talk to our advisers and we'll take it from there. We wouldn't rule anything in, and we wouldn't rule anything out either."
Neither did Woolworths. The company said it was evaluating the impacts of Extra's abandonment on the appeal process under way in the Supreme Court.
"Woolworths has not made a decision in respect of its shareholding in The Warehouse or any proposal."
THE NEXT CHAPTER
* The Warehouse's abandonment of the Extra format removes the key issue in the Commerce Commission's opposition to either Foodstuffs or Woolworths bidding for the Red Sheds.
* Legal experts say Woolworths can still go ahead with its appeal to the Supreme Court - and the new development only strengthens its case further.
* Alternatively either suitor could proceed with a bid - although there was a risk that the commission could oppose it on the grounds that The Warehouse could still be a future supermarket player.
