Country Road to acquire Witchery Group

Woolworths CE and Chairman of Country Road‚ Ian Moir said benefits of the deal included stronger negotiating power with landlords and a streamlined supply chain.

The Witchery Group consists of two brands‚ Witchery and Mimco‚ which operate through 210 stores and concessions in Australia‚ New Zealand and Singapore.

"This acquisition is immediately value accretive to Country Road. It's a very positive move for the Woolworths business‚ as a majority shareholder in Country Road. Its represents a far better return than cash sitting in the bank would at the moment‚" Moir told Business Day.

The Witchery transaction is expected to deliver synergies of approximately A$10m on an annualised basis‚ to be achieved over four years‚ Country Road said.

Jeanine Womersley‚ an investment analyst at Renaissance Capital said the Country Road division is currently margin diluting to the group.

"We have often questioned its strategic fit in the Woolworths stable. We think Witchery's two brands‚ Witchery and Mimco‚ with a combined store network of just over 300 stores‚ could provide the solution to this‚ with the acquisition bolstering Country Road sales by a further 60% (A$266m) and more importantly‚ being immediately margin-enhancing to the group‚" Womersley said.

Witchery was launched in SA through concession stores in Stuttafords in November 2010.

"Obviously we'll have conversations with Stuttafords‚ there is an agreement in place and that agreement doesn't cover all the territories or both brands‚" Moir said.

"With Witchery and Mimco being international brands‚ this could bolster the Country Road and Trenery offerings in SA‚ in turn improving the competitive edge of the Woolworths SA business‚ particularly with the likes of Zara‚ Cotton-On and Topshop's foray into SA‚" Womersley noted.

The acquisition will be funded through a new A$92m five-year senior bank facility and a capital raising which will allow shareholders to buy one new share for every two existing shares at an offer price of A$2.66 to raise $92m.

Woolworths will take part in the capital raising and contribute about A$81m of new equity‚ funded out of cash reserves. Woolworths had cash of R1.8bn on the balance sheet at interim-end.

According to Stephen Kulmar‚ retail consultant at New South Wales based Retail Oasis‚ Country Road got a bargain‚ as The Witchery Group‚ was "worth north of A$220m."

"Gresham Private Equity has been keen to exit for about the last 18-24 months. They attempted to put together a public float but withdrew at the last minute. Although Witchery was acquired for A$180m‚ Mimco was acquired for A$40m and the business is about 50% larger with substantial store openings over the last five years. So Gresham's return is not great‚" he said.

Source: Business Day