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Australia’s Woolworths and Metcash Trading agreed on Wednesday to buy the wholesaling and supermarket assets of takeover target Foodland Associated in a joint deal that valued the Perth-based company at up to A$3.38bn (US$2.6bn).

The deal, unanimously recommended by Foodland’s directors, would make Metcash, Australia’s largest grocery wholesaler, a far stronger competitor to the country’s dominant food retailers, Woolworths and Coles Myer. Woolworths’ purchase, meanwhile, would give it around 44 per cent of the New Zealand grocery market.

Under the cash-and-stock agreement, Woolworths would acquire Foodland’s New Zealand supermarket operations, along with 22 Australian supermarkets (including three development sites), for an enterprise value of about A$2.5bn.

Metcash, the Sydney-based owner of the IGA supermarket chain, has agreed to buy the bulk of Foodland’s Australian operations for A$780m in cash or A$859m under the stock alternative.

The agreement requires Foodland to undertake a demerger ahead of the seperate sales to Woolworths and Metcash through two schemes of arrangement.

Roger Corbett, Woolworths chief executive, said the deal provided a “significant opportunity” in New Zealand for Australia’s largest supermarket group.

“Going forward, Foodland also provides an attractive platform for further growth opportunities in New Zealand, including general merchandise and liquor,” he said.

The transaction would expand Metcash’s IGA supermarket business to more than 400 retail stores and would strengthen its position as “the third force in the Australian retail sector”, the company said in a statement.

Metcash first unveiled a takeover offer for Foodland six months ago with a proposal to purchase the company’s Australian operations for A$846m and spin off the New Zealand business. It had lifted the offer by 30 per cent to A$1.1bn earlier this month after its initial bid was rejected.

Andrew Reitzer, chief executive, said Metcash had negotiated a A$270m reduction in its cash purchase price because Foodland “wanted to announce a composite transaction for the entire company, and we understand that Woolworths’ offer for Foodland New Zealand was predicated on gaining some retail stores”.

The Woolworths offer, which comprises A$1.25bn in cash and assumed net debt , as well as 81.6m Woolworths shares, marks its first overseas acquisition and the second purchase in seven months, after paying A$1.3bn for Australian Leisure and Hospitality last October.

Analysts had speculated in recent days that Coles Myer might seek to outbid its rival, setting off a bidding war similar to last year’s battle for ALH, Foster’s spun-off liquor and pubs chain. But Coles Myer confirmed on Wednesday that it had no intention of bidding for any of Foodland’s assets.

John Fletcher, chief executive, said the retailer had examined the opportunity but had decided that an acquisition at current market values was not in the best interest of shareholders.

“Our approach to any acquisition is always rigorous, considered and disciplined and depends on us being able to generate appropriate returns on investment, which was not the case in this transaction,” Mr Fletcher said.

However Foodland chief executive Trevor Coates said it was still possible for another party to launch a counter offer for the West Australian chain although the company itself was not soliciting new bids.

He also confirmed that Foodland had rejected a takeover offer made by a private equity firm but declined to go into details.

The total offer for Foodland is valued at between A$3.28bn and A$3.38bn, depending on whether its shareholders elect to receive cash or shares from Woolworths and Metcash.

Foodland said the offer represented a price range of A$25.29 per Foodland share for the cash offer to A$26.17 per share for the stock offer, after subtracting net debt of A$300m, which fell within an independent expert’s valuation of the group.

By mid-morning on Wednesday, Metcash shares added 5.9 per cent to A$3.58 while Woolworths gained 0.8 per cent to A$15.75. Foodland was up 2.5 per cent at A$25.88.

Copyright The Financial Times Limited 2019. All rights reserved.

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