IT'S STRANGE HOW life can turn full circle. When grocery man the $A20-$A22range. The deal,half funded by debt and halfby equity, Ted van Arkel started out in the trade, he worked for Woolworths doesn't hurt the balancesheet too much, either. Foodland reckons debt New Zealand. Back then, he says,"We used to look at Progressive gearing of around 50% can be dropped backto itspreferred 45% upper and think, 'Gee, if only we could be that good.' 7om Ah Chee had limit within just one year becauseof the increasedcash flow. built a wonderful brand." So much for lower prices. He's talking about TomAh Chee and partner Norm Kent, founders Suddenly,Foodland hasgone from a small player (it had only 5% of of Progressive, which openea its first Foodtown supermarket in the Aussiegrocery market) with a discountedshare price, to a substantial Auckland in 1958 and became one of the major forces competing transtasmanretailer. In fact, the only transtasmangrocery retailer. That against other newcomerssuch as 3Guysand Countdown. makes it an attractive takeovertarget. Nobody owns more than 8.5% Now, severaldecades later, a perky-looking van Arkel is head of the of Foodland, so it would be easyfor an aggressivebuyer to establisha newlymerged Progressive and Woolworths.He should be perky.The new cornerstoneholding. Butworkingagainstthat, itis a tighdyheld stockand entity, ultimately owned by Progressive'sowner, Perth-based Foodland, recent price gainsmean any suitor would haveto payup now. has taken a year of wrangling and more than $3 million in legal coststo Analystsare predicting WoolworthsAustralia,as one of the two major dateto come to fruition. The resultis an impressiveoutfitwith a combined playersin the Australian market, maybe keen. It isn't saying,but it was 45% market shareand revenuesof closeto $4 billion. a bidder for Woolworths New Zealand and analystssay it could well Where there were three big grocery chains, now there are two; the afford to simply shift its attention to the bigger combined entity. More rival being owner/operator cooperativeFoodstuffs New Zealand,with speculative,and more fun, is the idea that WoolworthsAustralia maybe Too many small suppliers can't tell you what it costs them to move categories of product from point A to point B -that's the difficulty a dominant 55% share of the country's annual $9.2 billion supermarket the vehicle for US retailer Wal-Mart to enter Australasia,as Australian sales.Foodstuffs opposed the merger, tuming it into one of the most Coles Myer could be a vehicle for UK-basedTescos. hard-fought takeovers in recent corporate history, with legal battles The speculation doesn't end there: there's also talk about The going all the wayto the PrivyCouncil (see"Timeline"). But asFoodstuffs Warehouseentering the fresh food business.It's all fancy talk, though, chief executive Tony Carter says,"This is not over." and much of it assumesProgressive's takeover will work -quite an Although thedeal hasbeen settled,the feistyCarter is still pushingfor assumption. There is still plenty that could go wrong, especially if ajudicial reviewon the grounds the OverseasInvestment Commission Carter and friends have their way. (OIC) didn't look sufficiently at the impact on competition. The review wasdue in court as Unlimitedhit the newsstands.If the OIC decision is Key challenges overtumed, Foodland mayhave to sell itsWoolworths sharesand undo Tony Carter strides rather than walks. A no-nonsense man, he'd just the Progressive-Wooliesintegration to date -the management teams, come back from a weekend watching the All Blacksdo the Aussiesin joint promotions and IT systems.This would then trigger an appeal by freezing climes in Christchurch when we interviewed him. In charge of Foodland and the costlylegal stoughwould continue. the biggestof the three Foodstuffscooperatives, Auckland-based Carter Good for the lawyers.And competitors. doesn't back awayfrom a fight. Mter the Privy Council decision went Just why Foodstuffs has fought so hard is best summed up by its Foodland's way in April, Carter rang van Arkel to say,"We're going to opponent. ForvanArkel, it's a merger made in heaven."An opportunity be a very tough competitor out there in the marketplace." Van Arkel's likes this comes along once in a lifetime in anyone's industry. If you laconic response:"That's fine, we'll keep our boxing gloveson." believe it is right, then you go for it, stick to your knitting and work very The legal costs,which Carter won't reveal,have been spent protect- hard to ensure you achieve the desired result." ing Foodstuff's dominant patch. The takeover,Carter says,is not in the What's so right about it? For one thing, Foodland needed it to best interests of New Zealand consumers,as less competition equals happen. Caught in that awful neither-big-nor-small zone, Progressive higher prices and lesschoice. Nor, he admits, is it in the best interests had only 22% of the market (plus the 4-5% held by independently of Foodstuffs. His company has been the clear winner in the battle owned Supervalue and FreshChoice, which its wholesale division for supermarket salesin the past five years,growing turnover by $1.7 supplies).Progressive was in danger of being pushed outifWoolworths' billion and adding an extra 7% market share. Now it has a rival with former owner, Dairy Farm,had sold it to a bigintemational competitor. almost equal market share. "If Foodland didn't [buy Woolworths] theywere going to be subjectto The legal shenanigans are just the start for van Ark~l. Just as more competition from someone else and be left with a very awkward position in the market, with nowhere to go but, probably, out," says David Spry,retail analystfor FW Holst in Melboume. The combined companies solve the market share problem and, Success for the $690 million Woolies purchase hinges at the same time, create new opportunities -such as a potential $50 on six key issues: million saving in synergies,increased brand awareness(as either the Woolworths or the F oodtownbrand will be rationalised) and increased Deal-makers transtasmanbuying power.Foodland is planning to boostspending on .The merger gives Foodland transtasman buying clout newstores to gain more market share. .Economies of scale with an extra $1.6 billion in sales There's another aspectthat makes the deal so sweetfor Foodland, .Makes Foodland more attractive as a takeover target relating to corporate playsback in Perth. Sincebuying the Woolworths Deal-breakers , chain, Foodland's share price rocketed to a high of$A20. It has since .Judicial review may force Foodland to divest fallen to under $A18 due to investorconcems about the legal question, Woolworths shares but it's still double what it was 18 months ago and narrows the gap .Integration may not go as well as hoped betweenFoodland's valuation and its market price. Investorslike the .Some suppliers resist demands for better trading terms deal, as do retail analysts,boosting the company's valuation by $3 to important is achieving the anticipated synergybenefits of $50 million meaning goodsdamaged while in transit from supplier to supermarket). in three years.At 1.4% of costs,that's a conservativeexpectation, says Another anonymous supplier saysthe demands were no surprise but UBS Warburg senior retail analystKeira Grant. But it's what everyone's Progressivewas pushing them through in a "bulldozer fashion". expecting, if not more. To make these savings,Pfogressive must attack Mter criticism from suppliers,the ullage charge has been cut back the supply end of its business. to 0.15%, apart from fresh foods, but Progressivewill still savemoney For example, it is determined to increase the amount of packaged as it won't need to processcredits. goods coming through its central distribution centre from 70% to 90%. Griffins Foods boss Tony Nowell is lessfazed by the new expecta- Securing new trading tenDs from local suppliersis crucial. tions. All that is being asked for is transparency -small suppliers In its first Commerce Commission application, Foodland chief need to get their houses in order. "Too many small suppliers can't tell executive Trevor Coates said huge savings in the supply chain are a you what it coststhem to move categories of product from point A to major benefit from the takeover. Progressive has long argued that point B -that's the difficulty." Foodstuffshas used the buying powergenerated by its55% market share As you would expect in a competitive market, Foodstuffshas been to force suppliers to deliver direct to some of its stores (mainly Pak'N agitating behind the scenes,also meeting with suppliers and urging Save)for the sameprice asdelivery to a central distribution centre. This them to hold out on their existing terms. cut Foodstuffs' logistics costs,Progressive claims, while passing on a "Progressivehas said for manyyears that we get better trading terms higher cost of distribution to the rest of the industry. than they do, but 1 strenuouslydeny that. They chose to go to central Foodland was determined to negotiate new trading terms with distribution, so why should suppliersbe expected to pay for that?" asks suppliers by early August. Coates personally attended two Auckland Foodstuff'sCarter. Directdeliveryto storesis more common atFoodstuffs briefings with 900 or so suppliers in July to outline what the company Auckland than elsewhere.Carter is adamantFoodstuffs won't change its wanted, after it had trawled through Woolworths' books to compare trading terms asa result of any better dealsProgressive secures. what it had been paying. "One of the major concerns I haveis that the industry will split into It's not a good time to be a supplier. The smaller ones,in particular, two camps. I think that is a pretty unhealthy situation in that if those tried to stall.