Owner of Franklins chain says takeover situation must be sorted out or business may not survive

The long-running issue of whether grocery retailer and wholesaler Metcash should be allowed to take over rival supermarket chain Franklins has intensified, with reports its South African owners will tell the Federal Court that the business is unlikely to survive unless the $215 million acquisition gets the go-ahead.

Reports suggest losses are mounting for Pick n Pay, the owner of the business, and there are concerns these could be exacerbated by months-long legal battles.

This follows comments by Pick n Pay chairman Gareth Ackerman last week that a “protracted appeal process” could have a “strongly negative impact on Franklins’ already weakened financial position, which has deteriorated after ruthless targeting by the major supermarket chains and the weak consumer environment generally.”

A Metcash spokesman said the company understood Franklins’ financial position was deteriorating, and when the matter was concluded was a matter for the courts, although it hoped to have it settled by the year’s end.

The Australian Competition and Consumer Commission has appealed a ruling by Federal Court Judge Arthur Emmett last month permitting the takeover. The ACCC says that ruling, if unchallenged, would create problems for it when it came to future merger deliberations. It also says that a consortium of independent retailers is keen to buy the Franklins bid should the Metcash bid fall over.

The regulator says the takeover would diminish competition at the wholesale level, while proponents of the deal say a bulked-up Metcash, behind IGA supermarkets, would provide a much-needed competitor to supermarket giants Coles and Woolworths.

Metcash agreed to buy Franklins, which operates 80 retail stores and supplies groceries to 10 franchise stores, last July. It plans to on-sell the corporate stores to independent supermarket operators who would trade under its IGA brand, and retain the wholesaling business.

The Australian Competition and Consumer Commission was contacted for comment this morning on its expectations for how the case would continue, and whether the financial viability of the target has any bearing on its position on mergers. Metcash was also contacted for comment.

ACCC chairman Rod Sims told Inside Business at the weekend that the appeal was based on the idea that the takeover was not in the interests of independent supermarkets and therefore consumers to proceed, and another offer for the stores is likely.

“They [the consortium] already have their own volume. That volume with the Franklins volume will allow them to be a very effective wholesale buyer and that will make them better supermarket competitors with Coles and Woolies,” Sims said.

“So, we would expect that if the merger doesn’t proceed – then the main buyer for Franklins will be that consortium of independent supermarkets.”

Questioned whether the ACCC would allow Coles and Woolworths to pick up individual Franklins stores should the Metcash bid fail, Sims said the ACCC would look at the offers on a case by case basis, and block any offer where it deemed it would lessen competition.