PFD Acquisition: First COVID casualty in Food Services or an opportunity grabbed?

On August 19th, 2020 an announcement of acquisition of 65% stake of PFD by the Woolworths hit the headlines with possibility of taking over the rest of the stake after three years of completion of initial deal. The transaction has been boasted of as a landmark one by both Brad Banducci, the CEO of of the Woolworths and Kerry Smith of the PFD. As per Brad, “the investment will also unlock synergies for both businesses across the combined network and fleet’’. A grand use of vocabulary has been made by both the parties to justify the acquisition. Is this a first casualty as a result of the Covid 19 and it suited both the parties and the opportunity was quickly grabbed by them?

Relationship History of PFD and Woolworths

The relationship of PFD and Woolworths is not exceptionally old and dates back only to April 2020 as part of response to the Covid. So, the ‘long admired company’ as Woolworths puts forward while acquiring seems to be a little exaggeration but then such expressions are used quite often. So, nothing wrong in saying so.

What is the deal?

• The Woolworth will be 65% stakeholder for $552 million.

• Call options over the Smith family for remaining 35 per cent shareholding three years after the completion of the initial deal will be in place for the Woolworths. This means, if they want, they might by the rest of the stake if it suits them.

• Out of above mentioned $552 million deal, the Woolworths will acquire its holding for $302 million for cash. The transaction implies the Woolworths will be assuming net debt of $157 million of the PFD.

• Out of the total deal, balance $249 million will be spent on the properties of the PFD that will be transferred to the Woolworths which in turn will be leased back to the PFD.

  
  

What circumstances led to this acquisition? 

1. The Australian Government implemented lock-down all around Australia in response to Covid 19 resulting into temporary closure of restaurants, eateries and other food outlets.

2. There has been a steep fall of revenue of all the businesses and the PFD could not be exception.

3. Just like many other businesses, a large number of staff members were stood down by the PFD  till the situation improved.

4. There was a huge debt of 157 million on the company as stated above that could have become un-serviceable.

5. Besides, given the size of cold storage they have, they must have had a huge inventory of chilled, frozen and small shelf life goods immediately before the lock-down which would have passed the ‘Use by’ date and would have caused irreparable losses just like it happened with many other distributors.

6. The PFD tried couple of options to negate the effects of this difficult situation like which included:

7. They entered into an arrangement with the Woolworths through which the B2B customers of the supermarket could order the PFD range through the Woolworths website. 

8. They launched ‘PFD to Home service’ and many food services distributors including Bidfoods followed the suit. However, the Food Services distributors do not have necessary experience and the product range normally a retail customer would buy.

   
   

Looks like the steps taken at point number 6 were not possibly enough to service the debt as mentioned in point number 3. They must have had other fixed expenses too.

What is the result?

• First major casualty in the form of PFD in the food services sector. 65% stake of a $2 Billion a year revenue company goes for a cash of just $302 million. Out of this, $157 million will be used to service the debt. So, the owners of the PFD get just $145 million. They will have to meet their personal liabilities if any, out of that $145 million.

• The rest of the money will be paid to own $249 million worth of property of the PFD which includes its distribution centres. The Woolworths will lease back these properties to the company earning rent out of it.

  It sounds similar to the strategy of Mcdonald’s which is widely accepted as a ‘Real estate company’ instead of a ‘Burger’ selling company.

• Woolworths will get 70 strategic locations which it will be using to strengthen its presence all around.

  
  

Does it look like the owners of PFD were struggling and saw an opportunity in getting rid of a business that was potentially turning into a huge liability due to Covid? Is it the road map for many more businesses down the line? Did Brad, an intelligent person as he is, was quick to identify the hidden opportunity with in the two months of relationship with PFD and just grabbed it?

Disclaimer: All the information reflected above have been gathered from various news reports and is just an opinion. Please use judiciously and check the facts at your end too.