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Bursons acquisition of Metcash good for investors

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Bursons acquisition of Metcash good for investors.

Larry Williams:
Let's talk about Burson Autoparts — yesterday it announced it is acquiring Metcash Automotive Holdings. Now Fisher Funds has some shares in Bursons, how do you view these sorts of transactions?

Manuel Greenland:
We care about long-term value creation for shareholders. Often we find that company management teams will buy or sell things for all kinds of reasons; size is something typically the company managers like, so they buy things to make their companies bigger. For us a bigger company is not necessarily a better one. We like to see that an acquisition enhances the competitive strengths of a company and improves its long-term earnings potential. We've analysed this transaction and believe that it has every chance of making Bursons not just bigger, but also a better company.

Larry Williams:
Well that usually happens because management envisages synergies in the transaction, so what are the key cost synergies available in this acquisition?

Manuel Greenland:
I think the most obvious initial gain would be in purchasing. The company will combine the Bursons and MAH businesses and keep the valuable brands they've acquired — trusted names you'll know like Midas and Autobarn, so leave the customer facing end of the business intact — but they'll likely remove the cost duplication of having two purchasing departments. So not only do they save some costs, but they are suddenly a much bigger buyer than they were before, that probably means they can get better prices and terms from suppliers. Obviously other support services like accounting, human resources, legal and so on, can also be shared across the greater business, again improving cost efficiency and profitability.

Larry Williams:
Ok is it enough that they take a bunch of costs out of the business?

Manuel Greenland:
Well it is a very good start, because lower costs mean greater price competitiveness which in itself creates a problem for competitors — but the perfect business combination also presents opportunities to grow sales. A key sales opportunity we envisage from this acquisition is that Bursons ability to service national accounts will be a lot better. Historically they could only service some national customers and even then only in a limited way, because their own store network had limited geographic reach. With the acquisition of MAH, they instantly have a much broader store network. So they will be able to knock on the doors of national customers and say "hey we can service your needs anywhere in Australia". So it is not just a cost out story, there is also a sales growth dimension to this.

Larry Williams:
So strategically the acquisition makes sense — what do you think of the way the deal was done?

Manuel Greenland:
Well we don't really know what went on between Burson's and MetCash's management, but I would imagine the odds were stacked in Burson's favour. Metcash's grocery business ad you probably know is really at the pointy end of the increasingly competitive food retail environment in Australia, they urgently need to raise cash and refocus on their core business. Metcash probably considered listing MAH but the initial public offering market is showing some signs of weakness so they probably thought that would have been the longer and more risky route. I think that being able to walk in and sign a cheque would have put Burson's management at an advantage in the negotiation, allowing them to do a good deal.

Larry Williams:
So you're supportive overall then?

Manuel Greenland:
Yes, I think so. I think Burson's management have done an exceptional job since they themselves listed, it's been a really strong company and share price performance so has developed credibility among investors. This acquisition makes strategic sense and it looks like they've paid a reasonable price for it. The key from this point on will be for them to deliver on the very hefty promises they've made in selling this acquisition to the share market.

 

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