Wholesaler Metcash is eyeing three bolt-on acquisitions worth about $45 million after taking advantage of a boom in sales to launch a $330 million capital raising.
The capital raising – $300 million through a fully underwritten share placement at $2.80 a share and $30 million through a non-underwritten offer to retail investors – kicked off on Monday after Metcash revealed its strongest food sales growth in eight years, underpinned by panic buying and pantry filling at IGA and Foodland supermarkets.
While retailers such as Kathmandu and online travel company Webjet have been forced to raise emergency capital at hefty discounts, Metcash issued new shares at a discount of just 7.9 per cent to the $3.04 close on Friday.
Like Woolworths and Coles, Metcash has benefited from the COVID-19 pandemic as consumers stuck at home stock up on food and alcohol and undertake home improvement projects such as painting and gardening.
Total food sales for the five months ended March rose 4.3 per cent, or up 7.6 per cent excluding the loss of a contract to supply South Australia-based retailer Drakes. This followed food sales growth of 1.2 per cent in the September half.
Supermarket sales rose 4.8 per cent (up 8.9 per cent excluding Drakes) and wholesale sales excluding tobacco were up 5.5 per cent (9.8 per cent ex Drakes), a turnaround from the 0.3 per cent decline in the September-half (up 0.3 per cent ex Drakes).
"In food there was a two- to three-week period in March where there was panic buying – we were running our distribution centres 24/7 and still couldn't keep up with the volume," said chief executive Jeff Adams. "We've seen it come back down some but it's still at an elevated level."
Metcash, which is due to report full-year results in June, said the earnings benefit from higher sales in March and early April would be partly offset by increased costs to service elevated demand and manage health and safety risks. It was unknown to what extent elevated sales would continue once social distancing restrictions were relaxed or lifted.
Liquor sales were also stronger as consumers stocked up on beer, wine and spirits in fear that bottle shops would be closed after the shutdown of pubs and clubs last month.
Liquor sales rose 3.2 per cent in the five months ending March after rising 1.7 per cent in the first half. Higher sales at Metcash-supplied bottle shops in Australia offset weaker sales in New Zealand, where shops have been forced to close, and on-premise customers in Australia, which closed temporarily in the last week of March.
At Mitre 10 and Home Timber & Hardware, sales fell 1.3 per cent in the five months ended March, an improvement on the 4.2 per cent decline in the September-half. Stronger demand in the DIY and trade segments failed to offset the slowdown in construction activity, which was expected to continue into 2021.
Mr Adams said the equity raising reflected heightened uncertainty related to the COVID-19 pandemic and would enable Metcash to capitalise on opportunities that may arise.
"These are really unprecedented times and we've been dealing with a lot of uncertainty – the majority of our businesses are still trading and doing quite well but we have had some impacts and there's still a whole lot of uncertainty about what the future will bring," Mr Adams told The Australian Financial Review.
The proceeds would be used to complete three bolt-on acquisitions – two in liquor and one in hardware – provide working capital and operational support for retail customers, fund contingent liabilities and invest in the MFuture growth program.
Metcash has also negotiated $180 million of additional short-term debt facilities from existing lenders. The capital raising and additional debt facilities will provide Metcash with headroom of about $852 million.
Investors said the capital raising appeared opportunistic, given the fact Metcash had very low leverage and the shares were trading at the highest price/earnings multiple in 10 years.
"Perhaps the board is just being prudent but the given the share price run and lack of a pressing need for equity suggests this is opportunistically taking advantage of a historically high P/E multiple," said one fund manager.
While the S&P/ASX 200 index has fallen 24 per cent since its February 21 peak, Metcash shares have risen more than 8 per cent and reached a two-year high of $3.31 last month before closing on Friday at $3.04.