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Warehouse buys unprofitable Noel Leeming chain for $65m

UPDATE: Warehouse  [NZX:WHS] shares were up 1.29% in midday trading.


EARLIER: Warehouse Group [NZX:WHS], the country's biggest listed retailer, bought consumer electronics and appliance chain Noel Leeming Group for $65 million from Gresham Private Equity.

The Auckland-based retailer's acquisition will be completed today and is expected to add to the company's earnings immediately, contributing between $4 million to $6 million before interest and tax in the six months ended January 27, 2013, it says in a statement.

The 92 Noel Leeming stores will be operated as a separate trading division and is part of Warehouse's move to improve its Red Sheds' business.

"We are impressed with the performance of Noel Leeming Group over the past three years with strong management leading a talented team in the specialist consumer electronics and home appliance sector," chief executive Mark Powell says.

"We believe in the future growth of this retail sector and are pleased that the current team have agreed to stay with the business."

Last month, the retailer affirmed its view that next year's earnings will beat the 2012 result and said it sees signs of growth in consumer spending. Warehouse increased first-quarter sales 1.9% to $377.3 million on the strength of its stationery unit.

The company will fund the deal through its existing debt facilities.

As at March 31, Noel Leeming had total borrowings of $113.6 million, $73.5 million of which was owed to Bank of Scotland International, and $38.2 million outstanding to Gresham Private Equity by way of a shareholder loan.

The chain held $3.2 million in cash as at March 31. It is unclear how much debt of that still sits with the electronics and appliance chain once the deal is settled.

Noel Leeming narrowed its annual loss to $615,000 in the year ended March 31, from a loss of $3 million a year earlier, financial statements lodged with the Companies Office .

Revenue rose 7.6 percent to $607.8 million, and operating profit jumped 45% to $10.6 million. Employee expenses rose 14% to $60.1 million from a year earlier.

The appliance chain's goodwill was $95.1 million as at March 31 and relied on expected growth in underlying earnings and a growth rate of 2.5% from 2017 onward.

Warehouse shares fell 1% to $3.09 in trading on Friday and have increased 3% this year. The stock is rated an average "hold", based on eight analyst recommendations compiled by Reuters, with a median target price of $3.05.

Cameron Partners acted as an external adviser to the Warehouse board for the acquisition.


Comments and questions

I wonder how long the Warehouse will take to close the Bond and Bond chain? Looking at the Noel Leeming groups 'profits', it has been clear that they're spread too thin for some time, the first logical step would to be to axe Bond's... would it not?

I wouldn't give it a year... However, I would like to see the B&B stay and the Noel Leeming name go. Personal preference.

If anyone from Warehouse management read this, please please sort out the sales staff at Noel Leemings. Employing someone who knows how to plug in a stereo you want to listen to would be a good start.

Best Buy here we come?

Yep, Bond and Bond is the no-frills brand, which would clash with the limited appliance offerings that TWS offer.

Here are three other potential outcomes:

1. Expect co-location of Warehouses and Noel Leemings across the country. Not too hard to expect since this happens in some places already, and the property development wing of TWS will ensure it happens into the future.
2. Watch the Warehouse panic when they see that the higher margin software sales collapse in the computer section of Noel Leeming and B&B, as the software industry moves to an online distribution/App store model.
3. The finance book is key. F&P Finance is likely to come up for sale soon, and even if it's more than the Warehouse can afford, they will still need to leverage the benefits of finance to compete against the company which does pick up FPF. Imagine what the Warehouse will do with Noel Leemings superior hire purchase book and The Warehouse's volume? Look at all the financial products the Warehouse are now selling - even pet insurance !;pgid=2F9WMGj3dK9SR0wK12HZeRAy0000TT2oFKDy;sid=R3S8Q0ol9Fu-QxrgQcajSVuJKBcBI8rmmDY=

To compete, Noel Leemings need to match Harvey Norman deals.

With the shift in tech marketshare I beleive the ones to be weary of are JB Hifi, not Harveys. Harveys have a pretty stale customer proposition .....50 months, 48 months, 24 months interest-free and have dated stores, whereas JB is freshand vibrant and do well with stack it high and let it fly with a well-informed sales team.

Sounds like another stonking deal by Gresham. Buy for $138.5m and sell for $65m. Plus inject some $15m or so to keep the banks happy along the way...

Glad they don't manage my money.

They took out $100m in debt so $113m +$65m = $178m isn't a bad return on $138m in the current retail environment (or did the $138 include debt as well?).

Absolutely agree with Anon. The last place I would want to be is at NLG when TWL start clearing out the the dead wood. For all Noel Leemings' noise over the last few years, this fire sale transaction confirms that you're not always as good as you think you are.

I think TWL will turn whichever brand they decide to go with into a JB Hi-Fi clone. Their combined buying power and distribution means lower prices for all, which means I can buy a new TV every year for less. BOOM!

Hopefully, they will actually sort out the sales and service of Noel Leeming, which most times was my last choice to go to when buying electronic items. But knowing The Warehouse, the prices will probably drop but the service will, too.

JB Hi Fi will be number 1. Warehouse would have been better off buying a 5% stake in Trade Me than buy Bond and Bond!

We should be supporting New Zealand brands. JB and Harvey are Aussies.

I agree. The 100% Proudly Kiwi owned and operated line has become a bit of a farce. The NZ banking industry alone is over-run by our good old big brother Australia - taking all our hard-earned profits across the Tasman :-(

You stupid boy!
The consumer will support whom they wish, and so they should.
After all, the consumer is the ONLY employer of labour (there is no other). As such, they will employ the most efficient, and so they should.

Prices will only rise with limited competition...

Anybody heard of
Half the price - a preview at a retailer and buy online...

Give this time to work through. At least WHS are not looking to burn capital by trying to expand in Aus. Perhaps we end up with a Warehouse without electrical, NL with an expanded range of elelectronics, then plug all the business units into the same back office and centralised buying, and use best practice from all the company's on line e-tailing.

Hope Tindall and the Warehouse team do well. We need Kiwi-owned business success stories to remind our up-and-coming business graduates and entrepreneurs that there are fertile opportunities in NZ if you persevere and never ever give up.

Noel Learning.

Gresham Group brought for $138 million, still owe $113 million and possibly more and sell for $65 million. Great way to burn cash over eight years.

Great buying for the Warehouse as I'd say the bank was about to tell Noels the Christmas lights were about to be turned off on them.

I wonder if the Warehouse refer to this deal as "Our Killer Deal" Santa Approved?

Gerry Harvey will be spitting at the purchase. He would have made more money by buying and closing the stores down and keeping the good sites.