Embattled grocery and auto parts distributor Metcash Limited (ASX: MTS) can't catch a break.
Management's plans to spin-off its automotive accessories retail business has done little to support its sagging share price, which touched a fresh 14-year low of $1.10 this morning.
The divestment of its Autobarn retail division should have injected some excitement into the market given that these spin-offs have historically outperformed the market, but investors are too worried about the health of its core grocery business to pay that much heed.
As I flagged, Metcash is under growing pressure to sell its Autobarn business following its shock profit downgrade and dividend suspension and The Australian reported that management could consider a trade sale instead so that Metcash can get a badly needed cash injection quicker to turnaround its fortunes.
Fellow auto parts distributor Burson Group Ltd (ASX: BAP) is known to have been sniffing around.
Some analysts believe the divestment of the auto parts business could inject over $600 million into Metcash's balance sheet. That figure represents about three quarters of Metcash's total debt liabilities.
But cash in itself isn't the thing that is holding back the stock. The problem is the lack of a clear turnaround strategy.
Even if Metcash had the cash, what could it do to fend off aggressive if not desperate larger rivals like Woolworths Limited (ASX: WOW) and Coles supermarket owner Wesfarmers Ltd (ASX: WES)?
Interestingly if Metcash divests Autobarn, it could nearly match the $650 million investment Woolworths is making in new stores and infrastructure to win back market share, although Metcash will need a different playbook to muster a turnaround due to its business model.
Metcash supplies groceries to its 1,365 franchisees that run small format supermarkets under the IGA brand and it has a stake in some of these independent businesses.
The franchise model allows companies to expand more quickly as there is a lower capital requirement but the franchisor has far less control over how the outlets are run. When business is going well the franchise system is often superior, but when the industry is facing an upheaval it quickly becomes a lead weight.
To that end, Metcash could use the cash to buy back some of these independent operators, much in the same way pawn store operator Cash Converters International Ltd (ASX: CCV) did to bolster returns a few years ago.
Metcash could also use funds from the divestment to make a business-saving acquisition. The Australian highlights fruit and vegetable retailer Harris Farm Markets as an option as Metcash has tried unsuccessfully to buy that business before.
While these are options that Metcash is likely to be seriously considering, they are unlikely to be enough to arrest the decline of its core business, especially in the face of growing competition from offshore rivals expanding in Australia.
This is why Metcash's full year result on Monday will be heavily scrutinised by shareholders. Until management can articulate a clearer strategy, the stock is likely to remain under pressure.
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