Metcash (ASX:MTS) is forking out $300m for Superior Food Group but are investors missing something?

Ujjwal Maheshwari Ujjwal Maheshwari, February 5, 2024

Few large cap stocks go on large-scale shopping sprees like Metcash (ASX:MTS) is doing right now. By ‘shopping sprees’, we mean M&A activity. The ASX’s 3rd largest supermarket stock (and one of the largest consumer staple stocks) is raising $300m in capital to buy Superior Food Group from current owners Quadrant Private Equity, along with further acquisitions in the hardware sector.

 

Who is Superior Food Group and why is Metcash interested?

Superior Food Group is a big deal in the world of food. No, it is not another supermarket or restaurant chain, at least in its own right. It is the go-to folks for restaurants and cafes when it comes to getting ingredients, packaging, and even cleaning supplies. It is expected to rake in an impressive $55 million in profits by the 2025 financial year, valuing the company at a cool $500 million.

Now, Metcash has its eyes on them, and it’s easy to see why. Adding Superior Food Group to its family, which already includes popular names like IGA and Foodland, not to mention its businesses in liquor and hardware, the company’s PR department will likely say when the deal is official is like finding the missing piece of a puzzle.

With certainty, the media release which will confirm the deal will say something alone the lines of, ‘This acquisition aligns with Metcash’s strategic growth objectives, expanding what we offer and reaching more customers’. In our view, it might be too far over the top to say Metcash is a complete company and it was nothing beforehand. It is still clearly a minnow compared to Coles and Woolworths. Although this deal clearly will be a good one, so long as management can integrate it well.

 

Don’t forget Metcash is a hardware player

It is easy to forget that Metcash is also acquiring hardware supplies business Bianco for $82m and Alpine Hardware for $64m. Many investors, particularly those unfamiliar with the company, may not know that Metcash is already in the hardware game. It owns Independent Hardware Group, which owns Mitre 10 and Home Timber and Hardware, which spans a network of over 1500 stores. In 2020, it took a controlling stake in Total Tools and turnover has nearly doubled since then.

You could argue that this deal is more significant than Superior Food Group, given Metcash is dominant in the hardware sector and not the grocery sector.

 

MTS is tapping the Equity Market

One of the pivotal questions arising from this potential acquisition is the financial structuring of the deal. The AFR is reporting the deal will cost 6.9x earnings which would be $390-412m. It appears the bulk of this, but not all, will be funded by equity. Inevitably, it’ll be at a discount to the current price, although the AFR reports it’ll be a high-single digit discount. Current shareholders will likely be peeved, but they won’t be for long if indeed the deal ends up paying off in spades.

It’ll be up to individual shareholders to decide what ‘paying off’ means for them, most will agree that an increased share price will suffice – although to what extent will depend for each investor. Fund managers have leaked to the media that the deal will be ‘mid single-digit accretive’, presumably to earnings. Whether or not it’ll translate to the share price will depend on a few things, including how fast it materialises, if the existing business can grow at the same time and indeed whether or not it does at all.

 

Towards a big-name

In buying Superior Food Group, Metcash is stepping up its game in a big way to stand toe-to-toe with the heavyweights – Coles and Woolworths. Only time will tell if this deal pays off, but you cannot fault the company’s management for making bold moves to maintain the company’s position.

In our view, it is a bigger deal that Metcash is buying Bianco and Alpine Hardware. This is because this company already is the Great White Shark in the hardware market, and can solidify its position with this acquisition.

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