JP Morgan may have taken on one of the more challenging advisory roles in Asia Pacific this year. It is to advise Jardine Matheson subsidiary, Dairy Farm, on its sale of Franklins supermarket chain in Australia. However, analysts think it could be a tough sale.
Franklins is one of Jardines many interesting investments. It lost $71 million in 2000, following a loss of $27 million in 1999. It has also made a few cock-ups that have led to provisions. For example, due to several years of undetected computer system glitches it also had to write-off $35.7 million for ruinous stock control. On Monday, Dairy Farm said it had written down $129 million of Franklin assets.
Jardines bought Franklins in 1979, when it was a successful discount retailer in New South Wales. Throughout the 1980s the company made money. However, a combination of poor management and poor luck has seen Franklins lose market share in Australia, where it now commands 11% of the market. Key to this was the fact that it was late to anticipate the retailing trend towards fresh rather than dry goods. When it implemented this necessary strategy it got into trouble, and the losses began to pile up.
Franklins poor luck was also compounded when Australias GST sales tax was brought in last year. Admittedly, a very complex tax, Franklins nevertheless managed to screw up the implementation last July and had to give customers refunds for overcharging them.
A close follower of Jardines is conglomerates analyst (and former Jardine employee) John Godfray of Dresdner Kleinwort Wasserstein. He recalls that he was in Sydney last month in a suburb called Lane Cove. He said it was an eye-opener.
There was a Franklins right next to a Coles Myer [the market leader]. I went into both. It was chalk and cheese. The Franklins was depressing, with dim stripped lights and only two checkouts. The Coles was full and had 10 checkouts. The worst thing about the Franklins was it actually had some empty shelves which is a very, very negative sign for a supermarket retailer.
He sent out a research note several days after this visit to his clients highlighting the Franklins problem.
The problem Jardines faces is a paucity of buyers. Franklins is third ranked in Australia and the top two, Coles and Woolworths, have already been told they cannot buy Franklins because of the competition law.
That probably only leaves new entrant Aldi of Germany. The heavy discounter opened its first stores in Australia very recently. Ironically enough, The Sydney Morning Herald celebrated Aldis arrival by contrasting a basket of goods from Aldi with an identical one from, guess who, Franklins. The basket cost A$33 ($17.28) at Aldi and A$45 at Franklins.
Says Godfray: There is not a buyer in sight for Franklins. Aldi has been quoted as saying it favours organic growth over acquisitions.
Some people feel that Aldi might cherrypick Franklins best locations, but that approach would mean no brand value or goodwill would be involved. It would essentially be a real estate transaction.
A further factor that may be put Aldi off buying Franklins in its entirety are long leases at some of its less desirable locations. This was a problem that dogged Jardines when it tried to sell its Sizzler restaurant chain in Australia. It didnt find a buyer and ended up taking a provision of $50 million.
Franklins also has a lot of debt. It has operating assets of $354.2 million, and operating liabilities of -$232 million and other assets and liabilities of -$211 million. That means the firm is wholly geared and has negative equity of $90 million.