How Metcash Limited shares could climb on its home improvement business

Credit: stratman

What: As part of a wider range exit from its troubled home improvement business, Woolworths Limited (ASX: WOW) has announced the sale of the Home Timber and Hardware Group (HTHG) to Metcash Limited (ASX: MTS) for $165 million.

HTHG encompasses wholesale and retail operations including the well-known store brand Home Timber & Hardware. HTHG boasts a network of over 1,200 stores across company owned, bannered independent and un-bannered stores.

So What: In a presentation released to the ASX on Wednesday, Metcash stated that the acquisition price represented a multiple of about 7 times underlying earnings before interest, tax, depreciation and amortisation (EBITDA) and that it should be approximately 4% accretive to earnings per share.

Furthermore, Metcash noted that it expects to be able to extract synergies and release working capital.

From an operating perspective the acquisition of HTHG should fit nicely with Metcash’s owned Mitre 10 network. There is the potential to create greater scale and efficiency via numerous strategies including consolidating the distribution networks and leveraging increased buying power with suppliers.

The combined businesses are expected to have turnover above $2 billion and a store network of over 1,800.

Significantly, bringing these two businesses together will create a clear number two player in the Australian hardware market which of course is dominated by the Wesfarmers Ltd (ASX: WES) owned Bunnings.

Now What: To help fund the deal, Metcash is undertaking a fully underwritten $80 million capital raising at $2 a share to institutional investors, representing a 6 cent per share discount to the last traded price.

Retail investors will get an opportunity to take part in a share purchase plan, however, all shareholders will have to wait a little longer before the board recommences dividend payments as the company focusses on reducing around $85 million of debt which it will take on as part of the HTHG acquisition.

While the wholesale model and trade focus is starkly different to Bunnings’ retail model, Metcash’s experience at successfully running the Mitre 10 business should give investors confidence that this acquisition can be integrated successfully.

If you are interested in quality dividend shares, then I would recommend this top dividend share instead. A strong yield and potential share price gains make this a great investment idea in my opinion.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. 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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