Metcash shares down despite corporate watchdog approval

Metcash is about to diversify and become a bigger business.

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The Metcash Ltd (ASX: MTS) share price is currently down 0.3% after the ACCC approved its proposed acquisition of Superior Food.

But, the overall market is down more. The S&P/ASX 200 Index (ASX: XJO) is down by 1.3%, so Metcash is outperforming.

Metcash is best known as the supplier of IGAs around Australia, which are all independent supermarkets. The ASX share wants to gain exposure to the foodservice industry which supplies food to other businesses such as restaurants, cafes, hotels, clubs, petrol and convenience stores, and institutions like hospitals.

ACCC approval

The Australian Competition and Consumer Commission looked at how closely Metcash and Superior Food compete in the wholesale industry, how the acquisition may affect suppliers or increase Metcash or Superior's buying power, and the likely impact of the acquisition on prices, product range and quality.

According to the ACCC, market feedback indicated that they don't compete closely for customers. It said the merged entity will "continue to be constrained in the supply of food service products by established competitors such as PFD Food Services owned by Woolworths Group Ltd (ASX: WOW), and Bidfood."

The ACCC Commissioner Stephen Ridgeway said:

We conducted extensive market inquiries with customers, suppliers, competitors and industry associations. We ultimately found that the transaction would not be likely to substantially lessen competition.

We found that Metcash and Superior make up a very small percentage of the overall demand from food suppliers, and that suppliers would continue to have many other alternative routes to market.

Why does Metcash want to buy Superior Food?

At the time of the acquisition, Metcash said Superior Food would introduce new customer segments, range expansion, network efficiencies and supply chain benefits.

The deal would add $1.3 billion in sales and $43.8 million in underlying earnings before interest, tax depreciation and amortisation (EBITDA) for Metcash before synergies. Those synergies are expected to total at least $14 million.  

Metcash revealed there are further acquisition opportunities in a highly fragmented $21 billion market.  

This isn't the only business that Metcash is buying – it's also acquiring Bianco Construction Supplies (a business that operates in Northern Territory and South Australia), as well as Alpine Truss, one of the largest frame and truss businesses in Australia.

Metcash funded the buys with a capital raising by issuing more Metcash shares. The acquisitions were made at "attractive prices" and are expected to lead to EPS mid-single-digit improvement using backward-looking earnings. It should also lead to improving profit margins.

Metcash share price snapshot

Since the start of 2024, Metcash shares have risen by 11%, as we can see on the chart below.

Motley Fool contributor Tristan Harrison has positions in Metcash. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Metcash. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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