Bond & Bond more likely than Leemings for Harveys

By Matthew Henry

SYDNEY: Credit Suisse today said Harvey Norman’s mooted $300 million takeover of New Zealand retailer Noel Leeming is unlikely to go ahead, and instead suggested the company is more likely to buy the 33-store IT discount chain, Bond & Bond.

Credit Suisse sought to pour cold water on recent media speculation that Harvey Norman will make a $300 million acquisition of the Noel Leeming Group, suggesting any potential deal is unlikely to pass through the New Zealand regulators.

“We do not believe an acquisition of the whole business is likely,” said Credit Suisse retail sector analyst, Andrew McLennan.

“We estimate Harvey Norman has 20 per cent of the NZ retail electrical equipment market and we view the New Zealand Commerce Commission will likely baulk at allowing the group to take up further big licks of market share through such an acquisition.

“Furthermore, Harvey Norman has a history of not paying goodwill for businesses it acquires and has further potential to gain market share through organic expansion opportunities,” he said.

New Zealand’s first Norman Ross store will be opened before Christmas, and Credit Suisse is expecting that number to rise to three during the 2008 financial year.

However, Credit Suisse has suggested a more likely outcome would be for Harvey Norman to acquire retailer discount IT retailer Bond & Bond, which would give the company a stronger foothold in the discount retail market.

The deal would also be better placed to gain regulatory approval, despite handing the Australian electrical retailer a significant slice of the New Zealand discount market.

“Bond & Bond is a 33-store discount IT and electrical products retailer and would fit with the offering of the new Norman Ross brand, which is also expected to be a discount IT and electronics offer,” said McLennan.

“Although early days, we anticipate Norman Ross will take on an approximately 2,000 square metre footprint and generate approximately A$20 million per store. We doubt that NZ could handle a fresh A$600 million of new capacity in the retail electrical market (25 per cent market share in today’s sales) and therefore believe fewer stores than the mooted 30 would be considered for the format.

“We believe that for Harvey Norman to be interested, the price of the acquisition must be reasonable and the location and pricing of leases should also be of a level that enables the model to generate reasonable margins given the discount strategy. However, a sole focus on this theme would understate the strategic importance of such an acquisition.”

Such an acquisition would also push Harvey Norman ahead of JB Hi-Fi and Narta as the largest electrical retailer in the country.

“The Norman Ross discount strategy may be Harvey Norman’s way of more aggressively competing against the recent entry of discounter JB Hi Fi and the Narta buying group into the New Zealand market, however, the store expansion process will take time," he said.

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