Co-op Group in prime position for Nisa

A month can be a long time in business.  In July Sainsbury’s was given exclusivity in its bid talks for mutual grocery chain Nisa.  But in August, the Co-op Group became the exclusive bidder.


During those few weeks, Sainsbury’s grew increasingly concerned that a formal bid would be blocked by the Competition and Markets Authority.  This follows the CMA’s close scrutiny of Tesco’s proposed acquisition of the Booker Group.  Tesco bid £3.7bn for Booker’s, a grocery wholesale supplier to 5,000 stores branded under the Londis, Budgens, Family Shopper and Premier names.  This would potentially increase Tesco’s buying power and turnover by £5bn, but raised questions about whether it would create an unfair competitive advantage for Tesco.


The CMA opened an in-depth investigation into the Tesco bid for Booker on 12 July, following an outline consideration.  That initial consideration found that if the merger went ahead, it would mostly be a vertical rather than a horizontal merger – the impact would be mostly on supply chains, not in terms of loss of competition between stores.


However, it added, in some instances vertical mergers can be anti-competitive.  “The merged firm might harm the ability of its rivals to compete post-merger, for example by raising effective prices to its rivals, or by refusing to supply them completely. Such actions may harm the ability of the merged firm’s rivals to provide a competitive constraint into the future.”


That explanation was published on 9 August.  It would seem that at this point Sainsbury’s became concerned that the competition arguments related to the Tesco bid for Booker’s could similarly affect Sainsbury’s proposed takeover of Nisa’s.  Consequently, Sainsbury’s reconsidered.  Its exclusivity period lapsed on 14 August without it making a formal bid.


Nisa chairman Peter Hartley told his members: “Sainsbury’s have made it clear they remain interested in continuing to work with Nisa and potentially making an offer, but they have informed us they do not feel sufficiently comfortable to do so until they have greater clarity over the evolving regulatory and competition considerations.”


Hartley notified Nisa members on 14 August that the board was now re-engaged with the Co-op Group and “has held a number of positive discussions with the Co-op in recent weeks, following its reaffirmation of interest in making an offer for your company”.   In a subsequent letter to Nisa members, he indicated that subject to the results of exclusive due diligence being undertaken by the Co-op Group, a formal bid will be made by the Co-op.  It will then be up to the Nisa members to decide whether to accept it.


There are obstacles to a deal being finalised between the Co-op and Nisa, despite Nisa being under financial pressure for a sale.  Members had been told that the Sainsbury’s offer was superior to that from the Co-op and may be disinclined to now accept what they were told was an inferior bid.  The Co-op has recommitted to its prior bid value of £140m.  This is despite Sainsbury’s withdrawal and what might be regarded as Nisa now having a potentially lower market value – Nisa has just lost an important contract to Morrison’s to supply McColl’s, reducing Nisa’s turnover.  Ironically, McColl’s has also just agreed to take some Co-op branded items in place of Nisa branded products.


The intriguing aspect of a Co-op/Nisa deal is that it could lead to a change in the Co-op Group’s business model.  While Nisa is a mutual, it is a very different type of mutual from the Co-op.  Nisa membership is based on store ownership, with members’ stake being based on how many stores they own.


It is believed that one of the attractions of the Sainsbury proposal was that it offered store owners a franchise-type arrangement if they wanted it, so store owners might both receive cash and continue to own their stores under Sainsbury branding.  Could the Co-op also offer a franchise option?


In fact, the Co-op Group did agree earlier this year to become a franchisor for the first time in its history.  (Southern Co-operative already uses franchises for a few stores, but the Group has not done so before.)  MRH is Britain’s largest independent operator of petrol stations and associated retail outlets.  It announced in May that it will pilot seven outlets under the Co-op Group branding as franchised operations.


Jo Whitfield, the Co-op Group’s retail CEO, said at the time: “This is an exciting opportunity for the Co-op to expand its presence further in the convenience sector, one of the fastest growing areas in UK grocery.  This will enable us to test the franchise model and potentially pave the way for further expansion to move the Co-op brand and our own brand food into new communities.”


However, it seems that the Group is not willing to extend the franchise model until the pilot project with MRH has been assessed.  The Co-op’s proposal to Nisa is to enter into a wholesale supply agreement, not a full franchise operation.  Currently Nisa does operate as a franchise in its supply to 3,466 convenience stores, owned by 1,300 members.  It is unclear how a wholesale supply arrangement of branded goods, presumably sold in branded shops, would significantly differ from a franchise arrangement.  However, it is reasonable to guess that having sold the rights to supply to the Co-op that the store owners would not then pay a franchise fee to the Group.  One person close to the negotiations referred to this as being a “granular” issue, which presumably means that in practice the difference between a wholesale and a franchise arrangement is one of detail.


These matters must be surmised as the Group failed to respond to detailed questions.  A spokeswoman for the Co-op Group limited her comments to a statement issued about the bid.  The Group said: “We can confirm that we’ve entered into a period of exclusivity with NISA, which will provide the opportunity for us to carry out more detailed due diligence in the coming weeks. After this period and subject to approval from our Board, we hope to be in position where we can put forward an offer to NISA members.”


The Group is clearly now in the driving seat.  Exactly what vehicle it will be navigating if and when it takes over is as yet unclear.


Paul Gosling


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