KEY POINTS:
The next chapter in the long-running battle for the Red Sheds plays out in a Wellington courtroom on Tuesday.
But while the three day Court of Appeal hearing will ultimately decide the next steps in the corporate machinations to take over New Zealand's largest listed retailer, the market,
for its part, is already skipping ahead to the next instalment.
For most, the assumption is that the Commerce Commission's appeal against the High Court judgment clearing Woolworths and Foodstuffs to buy up The Warehouse Group will be unsuccessful - a notion legal experts agree is the most likely outcome.
So, the focus now is on a resumption of more tit-for-tat between the two suitors. Tantalising market speculators is the prospect of an on-market buy-up of free floating Warehouse shares by either Woolworths or Foodstuffs once the truce against any pre-emptive bidding expires on May 1 - the last day of the hearing.
Both parties already own 10 per cent - enough to prevent a compulsory takeover - but could potentially take their stake up to 19.9 per cent and change the dynamics of a future sale.
But with a decision at least three weeks away from the end of the hearing, that prospect is unlikely, as the truce had been sparked in the first place by jitters over a buy up delaying even further the sale process.
A share grab post May 1 would also look stupid, as one industry source said, if the Court of Appeal decision were to go against the bidders.
"I would think it's too ballsy for most boards in the current environment."
However soon a formal bid can take place, an Australian takeover is widely seen as a fait accompli.
"In terms of firepower, in terms of the key attractions of the Warehouse, in terms of access to capital, Woolworths wins hands down," said Macquarie Equities investment director Arthur Lim.
Lim said Woolworths had the advantage of operating in the general merchandise space through stores such as Dick Smith Electronics and Australian discount department outlet Big W.
"They are able to source products, services much more competitively from an economies of scale and support point of view. Also some of The Warehouse sites lend themselves to being converted into supermarkets or, under Woolworths, hypermarkets. And that's where a lot of benefits are going to flow through.
"There is the obvious, which is if you put a Warehouse and Woolworths together, you get rid of a lot of duplication of head office functions, administration-type functions, warehousing functions and the like, but for Woolworths the key strategic value resides in the fact that Warehouse gives it that quantum leap.
"Trying to grow Woolworths' offering in New Zealand organically in today's tight resource consent requirement environment is very, very tough.
And here, The Warehouse offers an expanded interface for customers."
But Foodstuffs, the more dominant player in the New Zealand supermarket scene, has shown that it has been the more savvy and aggressive player in this battle, buying a 10 per cent strategic stake well ahead of any public inkling of a potential sale, and applying for Commerce Commission clearance far in advance of Woolworths.
Its alliance with private equity firm Pacific Equity Partners could give it enough monetary firepower to match Woolworths dollar for dollar, while playing the New Zealand card that could sway the bid in its favour.
Patriotism should not be discounted in the equation, as Warehouse founder Stephen Tindall - who holds around 50 per cent - will ultimately anoint the winner in this battle.
Tindall has never spoken publicly of his preference, but an industry source believes Tindall, who is deeply involved in various New Zealand business and philanthropic ventures, would have a marginal preference for a New Zealand bidder. But it would boil down to price and with Tindall not a forced seller, one thing is clear: no one will get a bargain.
Macquarie's analysts pick a price range of between $7.50 and $8.50 per share - well north of Thursday's close of $5.70.
Lim said soft market conditions would not impact on Tindall's asking price.
"I think that all along, as an individual, he's had a view that The Warehouse is worth a certain number, and certainly I think the market's aware that he's been approached before and not been prepared to move on price."
Deutsche Bank analysts Kristan Walker and Matthew Iser, in their research note on the Red Sheds, put the probability of a takeover at 100 per cent.
"Unless there is a technical issue that emerges in the Court of Appeal, we expect the likelihood for corporate activity is high and value [the company] on our takeout valuation of $7/share."
That, they say, would be a price Woolworths can easily afford, based on its share price and trading multiple. Without a takeover, Walker and Iser value the stock at $4.65 a share, meaning a successful Commerce Commission appeal would see the share price plummet.
But a new bidder could also materialise - although the prospect is remote given the credit crunch. However, it remains possible the longer the legal wrangling continues.
The Australian Government this week announced the easing of restrictions on foreign supermarket chains, making it easier for retailers such as Costco and Wal-Mart to start operations across the ditch.
On its own, New Zealand's customer base is too small to attract the big Northern Hemisphere players, but an Australasian market in its totality does make expansion into the Antipodes all the more plausible - and snapping up the Warehouse would give a new player a ready presence and a strong base to expand from.
Whatever happens next, it's clear the Warehouse has come a long way from its humble 1982 beginnings in an old Takapuna warehouse.
Industry sources believe a takeover could just mark the point when Stephen Tindall and The Warehouse part ways. Macquarie's Lim certainly thinks so.
"The Warehouse will always be a part of Stephen, but I don't think Stephen necessarily sees himself as always being part of the Warehouse. I think there's a bigger world for him now, and the funds released would enable him to pursue that vision much more aggressively."
LONG WINDING ROAD
* The Warehouse has been in play since September 2006, when founder Stephen Tindall revealed plans to privatise, offering $5.75 a share in partnership with Pacific Equity Partners.
* Later that month he was trumped by Woolworths, which bought a 10.1 per cent stake at $6.50 a share.
* In December 2006 Foodstuffs - already a 10 per cent owner - declared its intention to bid for The Warehouse. Foodstuffs and Woolworths applied for Commerce Commission approval to proceed.
* In late June 2007 the commission declined their applications.
* An appeal against that decision was heard in the Wellington High Court in October.
* On November 30 the High Court overturned the commission's decision.
* The commission applied for leave to appeal the decision and on January 31, the High Court granted it.
* The commission's appeal is heard over three days beginning Tuesday in the Court of Appeal in Wellington.
RED SHED SCENARIOS
High Court decision is upheld by Court of Appeal (Likely)
Woolworths and Foodstuffs can proceed with bidding for The Warehouse
* Stephen Tindall opts to go with Woolworths - Woolworths is the market favourite, with deeper pockets and the opportunity for greater synergies as it already operates in the general merchandising market.
* Stephen Tindall opts to go with Foodstuffs - Tindall may opt to favour New Zealand-owned and operated Foodstuffs. The co-operative, with the aid of private equity firm Pacific Equity Partners, could match Woolworths' offer dollar for dollar, while playing the New Zealand card.
Commerce Commission appeal is successful (Unlikely)
* Privatisation - With the aid of Pacific Equity Partners, Tindall resurrects his 2006 plan to take the company off the sharemarket. Past negative reaction has hurt him and the move would only be possible if he thinks the premium for taking back possession is not too high.
* Status quo - Tindall keeps his 50 per cent stake and Woolworths and Foodstuffs each keep their 10 per cent - enough to block any new bidders.
* Foodstuffs or Woolworths nudge up their shareholding - Foodstuffs and Woolworths could still up their shareholding to 20 per cent by buying up free floating shares, but that is unlikely to happen if neither party can legally take over the Red Sheds. The other hitch is that very few Warehouse shares are free floating (circa 20 per cent).
* Foodstuffs or Woolworths let go of their shareholding - Highly unlikely. Foodstuffs, the more dominant player in the New Zealand supermarket scene, would stand to gain short-term profit, but is unlikely to give up the strategic stake. If the commission's appeal is successful, Red Shed shares are likely to head further south of the $6.50 Woolworths paid in September 2006 - meaning it would be selling at a substantial loss.
* A third player bids for The Warehouse - Unlikely given the economic climate. Northern Hemisphere retailers like Tesco have been rumoured to be interested, but that would depend on whether they want to have operations so geographically distant to their other interests. Aussie giant Wesfarmers could also be a player, but is unlikely given its purchase of Coles. But its announcement this week that it is now seeking to raise capital and not debt to finance the purchase means a move on The Warehouse is slightly more plausible.
