Six months have passed, and the dust has settled on the Masters Home and Hardwares shakedown in January. The hardware retailer lost Woolworths and its joint venture partner Lowe’s over $600 million and failed to offer any real competition to the ascendancy of Bunnings. Woolworths has decided to sell up and is looking for bidders for Home Timber and Hardware, a part of the Woolworths hardware and home DIY offering.
Downfall of Masters Home Improvement
Woolworths planned Masters Home Improvement as a competitor to Wesfarmers’ Bunnings. Established in 2009, Woolworths and Lowe’s sunk billions into the project only to watch it fail due to the high barriers to entry, bad choice of products (choosing the wrong products at the wrong time) and a reputedly lacklustre workplace culture and store experience.
In our last article, we said that Woolworths had two options. Woolworths could either (i) sell Masters or (ii) undertake a voluntary winding up. We said that selling the business might prove difficult, given the heavy losses suffered by the company. Selling up would be more successful if Masters was broken into bits and the chunks sold to interested parties (such as different Masters sites sold to big-box retailers). A voluntary winding up would involve deregistering a company so that it ‘ceases to exist’ (see section 601AD(1) Corporations Act 2001 (Cth)) and the procedure to follow differs depending on whether the company is solvent or insolvent.
Besides Masters Hardware, Woolworths’ also owns Home Timber and Hardware which is small, yet profitable. No suitable buyers have yet been found for Masters Hardware, but a string of eligible buyers have knocked on Woolworths’ door for Home Timber and Hardware.
Woolworths is likely attempting to recoup some of the losses it has incurred since the inception of Masters, while it waits for greater interest in Masters. Woolworths is also still locked in negotiations with its joint venture partner Lowe’s, on the value of Lowe’s 30% stake in the business. Before Woolworths can sell, it needs to agree on a price to buy out Lowe’s share.
Metcash Bid for Home Timber and Hardware
In the end, our suggestion that Woolworths should break chunks of the business off and sell them proved prescient. Woolworths has broken off Home Timber and Hardware Group (HTHG) and plans to sell it to interested parties. Some commentators have said that this will be the ‘easy’ bit, with the harder task being the sale of the Master’s business, which lost most of the $3 billion invested in it.
Harvey Norman, Super Retail, Costco, Ikea and South Africa’s Steinhoff have been slated as possible buyers of HTH, however Metcash looks to be taking the lead in bidding for HTHG.
The guardian of fair and efficient competition in Australia, the ACCC, worries that the Metcash takeover of HTHG would ‘substantially lessen competition’.
Metcash owns the Mitre 10 and True Value Hardware brands. Mitre 10 supplies products to around 325 Mitre 10 and True Value Hardware bannered independent stores. HTHG is a wholesale supplier of hardware to independent retailers, including those operating under its banners ‘Home Timber and Hardware’ and ‘Thrifty-Link’. HTHG says that it has a reach of over 400 sites, comprising a mix of company-owned and independent businesses.
HTHG is Metcash’s closest competitor, due to the similarity of the services that both parties provide. For a significant proportion of independent retailers, the proposed acquisition would combine the only two independent wholesalers that offer a broad range of hardware and home improvement products. The ACCC understands that independent retailers can and do switch between Metcash and HTHG to secure a better price and nonprice terms (e.g. longer periods to pay, quicker delivery). If the proposed acquisition went ahead, it wouldn’t be possible to switch between the two.
The ACCC is concerned that the acquisition would increase wholesale prices, increase the incentive for Metcash to discriminate against independently owned retailers where a Metcash business or joint venture competes directly against the independent store and could potentially lead to muted retail competition between stores (it’s more difficult to compete on price when your competitor is buying the same products for the same price from the same wholesaler). These factors, individually and taken as a whole, are very likely to have the effect of substantially lessening competition. That’s the red flag for the ACCC.
What is at the ACCC’s disposal to protect efficient competition in Australia?
Section 50 of the Competition and Consumer Act 2010 (Cth) prohibits takeovers which would ‘substantially lessen competition’. The ACCC doesn’t need to wait until the takeover has occurred and there is, in fact, a substantial lessening of competition; the ACCC can prevent takeovers which would be ‘likely to have the effect’ of substantially lessening competition.
Metcash is clearly keen to proceed with the bid as it’s gone to the trouble of offering an enforceable undertaking to the ACCC. An enforceable undertaking is an option under section 87B of the Competition and Consumer Act 2010 (Cth) for any organisation considering purchasing another business, where the purchase would, or would likely have the effect of substantially lessening competition. Other well-known businesses which have offered enforceable undertakings in the past include Coles and Woolworths. Both promised not to offer fuel discounts where the discount is available only to customers purchasing at the respective supermarket (see ACCC v Coles Group Limited  FCA 363 and ACCC v Woolworths Limited  FCA 364).
The aim of the undertaking is to address the ACCC’s competition concerns, i.e. so Metcash promises not to inhibit competition in the ways outlined above. Metcash promises not to restrict the ability of any member store (i.e. any of Home Timber and Hardware, True Value, Thrifty Link, etc.) to purchase goods from other suppliers and not to discriminate against independent stores who compete directly with a store owned by Metcash (a Metcash corporate store). Metcash has also promised to provide information about its promise to member stores, and it has also promised to allow the ACCC/an independent auditor to oversee its compliance with the undertaking.
The promise lasts for 10 years from the commencement date (the date Metcash signs the document). The undertaking was signed 18 July 2016, so Metcash has to keep its promise until 18 July 2026. Otherwise, Metcash’s obligations cease if the undertaking is withdrawn or revoked.
What Happens if Metcash Doesn’t ‘Play Nice’?
If Metcash breaks its promise, the ACCC has a number of options. Firstly, the undertaking provides that an independent auditor will be appointed to monitor Metcash’s progress.
If the independent auditor finds or the ACCC otherwise receives notice that Metcash has broken its promise, the ACCC can take Metcash to the federal court. What can the ACCC do in the federal court? The ACCC can request that Metcash is compelled to comply, have Metcash pay compensation to those who suffered damage due to the breach or have Metcash pay to the Commonwealth the amount of any financial benefit received attributable to a breach of the undertaking or any other order the court thinks is appropriate.
Going to court for breach of the undertaking could be an expensive exercise for Metcash, as well as the reputational damage it would suffer from making it harder for smaller hardware stores to survive.
The consensus is that the Woolworths venture into the home hardware business was a phenomenal loss, netting millions of losses and significantly impacting on the Aussie giant’s growth prospects in the coming years. Woolworths hasn’t received any interest in its Masters brand, but it is looking (and has received interest) to sell Home Timber and Hardware Group, the smaller and more profitable hardware retailer which incorporates the ‘Home Timber and Hardware’ and ‘Thrifty Link’ brands.
Metcash is the bidding race’s Phar Lap and has even gone to the extent of signing an ‘enforceable undertaking’ with the ACCC to reduce the ACCC’s fears that the acquisition would lead to a substantial lessening of competition in the hardware wholesaling market. Metcash has promised that it won’t make it harder for independent stores to compete against its stores and other undertakings designed to ensure healthy and robust competition remains in the market.
If you’re a retailer that might be affected by these corporate moves, you should obtain a copy of the enforceable undertaking signed with ACCC (available here) and speak to a consumer lawyer about your concerns.