It’s a tale of two sales: both are looking like good buys for the purchasers, and it’s a profitable sale for one of the vendors. There’s been a lot of talk about two well-known New Zealand brands changing hands: Noel Leeming being bought by The Warehouse and Trade Me being sold by Fairfax.
They’re an interesting contrast. Noel Leeming is solidly in the traditional bricks and mortar retail space. It’s been losing money during the past few years of recession, although if the 30-plus iPads a Wellington store sold on one pre-Christmas day are anything to go by, things might be looking up.
The Warehouse, another traditional retailer, bought the chain, including associate Bond and Bond, for $65 million from the Gresham private equity fund for what appears to be a big discount on the $138 million paid eight years ago to Eric Watson’s Pacific Retail Group. Gresham became involved as part of a management buyout. Noel Leeming was on the market for a year and its banker didn’t want to lend it any more money.
Time will tell whether it is a good buy. The Warehouse gets access to Noel Leeming’s electronics brands, and there will be back-office savings and possibly profits from excess property. But competition in the sector is tough, especially from online sales.
Trade Me, meanwhile, is the face of digital retailing – but even it is considered “mature” to some investors in these fast-moving times. It’s a great deal for Fairfax, realising $1.7 billion from its $750 million investment, which at the time people thought was a lot. I know of one major New Zealand company that had been prepared to pay only a fraction of that – but in hindsight it must be rueing its stinginess.
So, is Fairfax selling the jewel in its crown? Trade Me has grown nearly 20% over the past couple of years, and sees plenty of expansion to come from jobs and motoring classifieds, new areas like travel and its recent foray into bach rentals through the acquisition of holidayhomes.co.nz.
With healthy gains in the bag and a need to reduce debt, it makes sense for Fairfax to sell. It’s much easier to quit something if you leave some potential for the buyer. There’s murmuring about Trade Me shares being sold primarily to overseas fund managers. But the company is listed on the New Zealand stock exchange and anyone who wants to buy shares can do so. Fairfax needed the money. It recently wrote down $3 billion of goodwill on its newspaper mastheads, so this significantly strengthens its balance sheet.
It may look to raise more cash through a New Zealand share float, something also mooted for the banks, and seen as a way of solving dividend imputation problems. That would be a blast from the past, as most of Fairfax’s newspaper assets were previously directly listed here.
Independent Newspapers (my former employer), partly owned by Rupert Murdoch’s News Ltd, took over a range of titles, including the Christchurch Press, while it was listed. Marketing a float would be a challenge. Fairfax has cash flow but weakening print advertising sales and a digital news business yet to shine. Something would be needed to sweeten the offering. It is now a smaller company with a better debt-to-equity ratio that is aiming to increase online revenue using its media assets as a base.
Trade Me is coming of age, making a $75 million profit, usurping the newspaper classifieds of old and expanding further into the digital space – although its expertise didn’t solve the puzzle of how to make money out of digital news services.
The Warehouse’s challenge will be optimising its bigger retail footprint at a time more and more is being bought online. Shopping remains very popular entertainment and so bricks and mortar retailers will be around for a while. But you have to sell a lot of iPads to pay the rent and wages.
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