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Could the ACCC proceedings deflate the Woolworths Limited share price?

Credit: Scott Lewis

What: Investors probably thought the news from Woolworths Limited (ASX: WOW) couldn’t get any worse, however, on Thursday it did with the Australian Competition and Consumer Commission (ACCC) instigating proceedings in the Federal Court against the supermarket retailer. It is alleged that Woolworths had engaged in unconscionable conduct in dealings with a large number of its supermarket suppliers, in contravention of the Australian Consumer Law.

So What: According to the ACCC’s allegations, Woolworths looked to improve its profitability by requesting payments from what it described as “Tier B” suppliers. The alleged payments scheme – which was referred to as “Mind the Gap” – ranged in payment size from $4,291 to $1.4 million with the aim of raising $60.2 million. The ACCC alleges that ultimately Woolworths was successful in capturing around $18.1 million from these “Tier B” suppliers.

Now What: The instigation of proceedings against Woolworths follows on from the ACCC investigation and proceedings against Coles Supermarkets, owned by Wesfarmers Ltd (ASX: WES), for engaging in unconscionable conduct against its suppliers.

The ACCC is seeking injunctions including an order requiring the full refund of the amounts paid by suppliers under the Mind the Gap scheme, a pecuniary penalty, a declaration, and costs.

From an investor’s point of view this action by the ACCC will be a time consuming distraction for management and could very well weigh on the Woolworths’ share price. However in the long term it is unlikely to have a significant effect on the stock’s underlying value.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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