Noel Leeming purchase fails to impress

Last updated 12:22 11/12/2012
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The Warehouse's $65 million purchase of Noel Leeming Group has failed to impress investment firms, prompting Forsyth Barr to recommend Red Shed shareholders sell down their stock. 

Meanwhile, Goldman Sachs said the acquisition was not enough to alter its subdued earnings outlook for the Warehouse Group. 

In a research note, Forsyth Barr analysts Chelsea Leadbetter and Andy Bowley questioned the "strategic rationale" of the buy, given the intense competition, low margins and price deflation in the consumer electronics sector.

"We question the attractiveness of the acquisition given the unfavourable market dynamics."

They said the acquisition would be earnings accretive - and lifted their estimates of net profit for the 2013 and 2014 financial years by 6 per cent  to $73m and 4 per cent to $77.8m respectively.

But in the absence of "significant synergies", the deal would dilute returns. 

The Warehouse had struggled to compete effectively in consumer electronics, the analysts noted. 

"While in theory this acquisition may give Red Sheds greater access to brands, in practice we do not believe this will necessarily happen."

The move into specialty retailing created additional risks, and The Warehouse had experienced mixed success in stationery, while performance in the Red Sheds had deteriorated for a number of years. 

"We are unconvinced that management has the right skills and experience to add significant value to Noel Leemings."

Given a recent rally in The Warehouse's share price, and Forsyth Barr's downgrade of its 12-month target price to $2.90, the investment services firm recommended shareholders reduce their holding in the retailer. 

A research note from Goldman Sachs said it retained its sell recommendation for The Warehouse shares. 

"Aside from an immediate step-up in earnings, the bolt-on acquisition is not large enough to alter our subdued medium-term earnings outlook."

The Warehouse's valuation did not appropriately reflect "high cost and uncertain repositioning of Red Sheds and growing competition levels from specialty and online retailers".  

Shares in The Warehouse were trading down 1.6 per cent on the NZX at $3.05 late this morning.  

The $65m purchase price for the Noel Leeming Group - which has about 1500 staff in New Zealand and includes 92 Noel Leeming and Bond & Bond stores - is less than half the $138.5m paid by its previous owner, Australian private equity firm Gresham Private Equity. 

The Warehouse did not take on the group's debt, reported in its financial results for the year ended March 31 to be $113.6m. 

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Gresham bought the group off Eric Watson's Pacific Retail Group in 2004.


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