Competition watchdog raises red flag over Woolworths' $552m foodservice acquisition

Competition watchdog raises red flag over Woolworths' $552m foodservice acquisition

The competition regulator has raised concerns Woolworths' (ASX: WOW) considerable bargaining power with suppliers could be strengthened further if a proposed acquisition of wholesale distributor PFD Food Services goes ahead.

Woolworths plans to acquire 65 per cent of the company, which buys a wide range of food products from manufacturers and distributes them to restaurants and cafés, fast food franchises, hotels and clubs around the country.

The retailer also plans to spend hundreds of millions of dollars on properties to be leased back to PFD, with the deal also involving options to buy the remaining 35 per cent from the Smith family three years after completion.

The Australian Competition and Consumer Commission (ACCC) notes both Woolworths and PFD acquire food and groceries from suppliers such as frozen food manufacturers, dairy processors and manufacturers of pasta and sauces.

"The ACCC is concerned that the proposed acquisition seems likely to increase Woolworths' already substantial bargaining power in its dealings with food manufacturers," says ACCC Chair Rod Sims.

"The ACCC is concerned that the proposed acquisition would remove PFD as an important alternative customer in the food sector, reducing the number of buyers and increasing Woolworths' relative size as a customer of food manufacturers and suppliers.

"The dominance of Coles and Woolworths in food retail means that wholesale food distribution is an important alternative customer channel for manufacturers."

Woolworths was previously hoping to get the deal over the line by the end of this calendar year, but now it will need to wait until the ACCC's final decision on 22 April 2021. The regulator will be receiving feedback on its statement of issues until 1 February 2021.

The ACCC is also considering whether the proposed acquisition could affect downstream competition.

"If Woolworths was able to use its existing bargaining power as a retail buyer to gain better supply prices for PFD than PFD could obtain on its own, in the medium term this could have serious consequences for the structure of the wholesale food distribution sector, such as reduced range, choice, and service levels," says Sims.

The competition regulator is also continuing to consider other issues, including whether Woolworths acquiring a company which supplies its competitors will lead to risks of foreclosure, and the extent to which Woolworths at Work and AGW compete with PFD at the moment or are likely to compete with PFD in future.

Woolworths CEO Brad Banducci says the company has been working closely and constructively with the ACCC on the issues raised.

"We remain confident that we will address any outstanding potential concerns so that we can progress the proposed partnership," he says.

"We see no reduction in competition, in any relevant markets, from our proposed partnership with PFD."

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