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Rumoured tie up between Mitre 10 and Home Timber & Hardware

Mitre 10 Australia

A tipped $2 billion tie-up between Mitre 10 and Home Timber & Hardware Group could provide Bunnings with some strong competition and has sparked predictions of a hardware price war.

A union of the two franchised hardware chains would create a network of between 800 and 900 stores, and with the right leadership analysts suggest it could harness its buying power to fight Bunnings on price and brands.

Industry insiders suggest Metcash, which owns Mitre 10, has already reached out to Woolworths, which controls the Home franchise, but it was told it was too early for talks, one source said.

An industry insider says Bunnings is more concerned about a merger between Mitre 10 and Home than the future of Masters.

The Mitre 10-Home courtship has been largely overshadowed by the listing ship that is Woolworths' Masters Home Improvement business and speculation over what chair Gordon Cairns will do with the hardware business now he's committed to accelerating the Woolies turnaround.

It’s understood Bunnings has already earmarked at least 15 Masters sites it would buy if the business was liquidated, but one industry insider said the dominant hardware player was more concerned about a merger between Mitre 10 and Home than the future of Masters.

This is particularly so given both both Mitre 10 and Home have strong strong backing in the $23 billion a year trade sector

Hardware expert Geoff Dart said Home's trade sales were worth about $350 million, and Mitre 10's totalled about $450 million compared to $1.5 billion in trade sales at Bunnings.

"I find it hard to believe Bunnings is worried about Home-Mitre 10 on the retail side, but it would be more of a challenge ... on the trade side, which is the strength of Home and Mitre 10," Mr Dart said.

Bank of America Merrill Lynch analyst David Errington has valued the Danks business, which includes the Home Timber and Hardware chain, Thrifty-Link Hardware and the Plants Plus brand at about $200 million, but Mr Dart said the price could be less than half that.

"I personally don't think [Dank's] earnings are sustainable because I'm not convinced the growth is sustainable now it's run by grocers," Mr Dart said.

Danks earnings before interest and tax reached $20.9 million last financial year, bolstered by its acquisition of Hudson Timber and Hardware and Belmont Timber.

Its earnings have almost doubled since the business was bought by Woolworths and its hardware partner US retailer Lowes in 2009.

Metcash would not comment on what it called speculation, but Mitre 10 boss Mark Laidlaw told analysts in late September the Home business would be a great fit with its franchised operation.

Morgan Stanley analyst Tom Kierath said Mr Laidlaw said at the strategy presentation it was interested in buying Home or putting the two businesses together.

The mooted corporate activity could chart the course of Australia's home improvement sector for the next 10 years, and that will mean big changes for shoppers and suppliers in this $46 billion sector, according to Mr Dart.

"It's an exciting time for the industry, but suppliers are really the ones who are going to have to look at channel strategies, what they do, where they seek growth," Mr Dart said.

"For suppliers who are in both [Bunnings and Masters], they will be fine because their customers will just go to Bunnings ... but the suppliers that aren't there, it will be challenging for them."

There are some big-name home improvement brands in this position, including Hitachi, Yates and Wattyl.

For shoppers, industry consolidation and the potential emergence of a new hardware operative with the market muscle to compete with Bunnings could trigger a price war.

Both Mitre 10 and Home have strong consumer brands, and in combination analysts suggest they could challenge on price and promote their exclusive brands to drive sales.

But any battle would test the mettle of the new combined entity as well as the depth of its relationships with suppliers.

Retail analyst Steve Kulmar said there was strong logic underpinning the talk of a union between Mitre 10 and Home in what was still a highly fragmented market despite Bunnings' powerful presence.

Market leader Bunnings has 18 per cent, Mitre 10 about 4 per cent, and Home a 3 per cent share.

Consumers will have to wait until Woolworths reveals its hand on its home improvement business to benefit from any price war, but behind the scenes everyone seems to be preparing their battle plans.

Source : Catie Low – Sydney Morning Herald

16 November 2015

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