Jardines sells Australian supermarket chain

JPMorgan is close to completing one of the year''s more challenging M&A transactions.
When JPMorgan took on the role of adviser to Jardine Matheson subsidiary Dairy Farm, in its bid to sell off its ailing Australian supermarket chain Franklins, many could have been forgiven for thinking this was the M&A equivalent of a poison chalice.

Buyers looked thin on the ground, especially since the Australian Competition and Consumer Commission (ACCC) had made it clear that the chain’s 255-store network could not be sold en masse to either of the major chains, Coles and Woolworths.

Add to that the fact that Franklins had stumbled from one PR disaster to another and lost a combined $100 million in 1999 and 2000. Moreover, in February, Dairy Farm wrote down $129 million of Franklins assets, while the CFO confirmed the Australian firm was wholly geared and had negative equity of $90 million.

However, JPMorgan has succeeded in breaking Franklins up and selling off the pieces.

Today it announced that South Africa’s Pick’n Pay would buy 53 of the stores for $52 million. Meanwhile 67 will be sold to Woolworths for $119 million, and a further sale of 35 stores to Foodland and 100 to Metcash is being negotiated.

That still leaves 20 stores – which will be closed down, with related costs.

However, JPMorgan could not achieve the impossible. The sale still leaves Dairy Farm with a mess on its balance sheet. On a Pick’n Pay statement issued today, Dairy Farm stated: “The surplus over carrying value related to this transaction is expected to be offset by closure and related costs of the managed sell-down process for the remainder of the Franklins’ store network.”

As one analyst explained, this means that additional provisions that will have to be taken will mean that the profit from the sale will not allow Dairy Farm to write back any of the provisions it took last year.

In part, that is because Franklins has a lot of debt.

If Dairy Farm could have sold the chain off as a whole, it might have made the pain a bit more bearable. But Australian competition policy is amongst the most vigorous in the world. Compare that with Hong Kong – which has no anti-trust body – where Dairy Farm recently sold off its wholesale grocery business, Sims Trading to Citic Pacific without any problems, in spite of the fact that Citic was already a major player in that business.

Says JPMorgan managing director, George Hongchoy: “The ideal transaction would have been to sell the whole lot [of Franklins], but that was not possible given the competition regulator in Australia, so we completed a strategic review and came with a plan and executed it methodically. Everything has gone according to plan.”

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