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Farmers lifts F&P Appliances

By Duncan Bridgeman

Friday 17th October 2003

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Fisher & Paykel Appliances' shares traded strongly this week as investors welcomed the company's part in solving the Farmers sale riddle and the signing of a new distribution agreement in the UK.

At press time yesterday the stock last traded at $14.80, down slightly from a 10c gain to $14.85 on Wednesday. The shares hit an all time high of $15.90 last month.

The Farmers deal, under which F&P Appliances will pay $188.7 million for the finance and credit card business, carries double benefits for the appliance manufacturer.

It allows the company to continue its exclusive dealer arrangement (EDA) with Farmers, while at the same time doubling the size of its finance book. The purchase also gives F&P straightforward entry into technology services through the Farmers credit card service.

F&P Appliances managing director John Bongard yesterday dismissed suggestions the company had controlled the Farmers process with a view of taking a defensive position.

"As far as the board is concerned the finance transaction had to stand on its own two feet," Mr Bongard said.

He estimated the deal would add annual earnings before interest, tax and amortisation (ebitda) of $24 - $28 million while extending its EDA with Farmers for a further 20 years.

However, he admitted a Farmers sale to another appliance retailer outside the Farmers EDA would have caused some concern.

"Even then we had a plan B so we were reasonably comfortable."

Farmers had been for sale by Australian-based owner Foodland Associated for more than six months but several interested parties withdrew from the bidding process after disagreements over the asking price.

But F&P was always considered a strong contender due to its interest in expanding its finance operation and the synergies that existed between the two companies.

In the end it was unlisted retailer James Pascoe that formed a partnership with F&P by agreeing to pay $122.3 million for the Farmers retail division. Pascoe has a proven track record in jewellery but will enter the highly competitive department store arena relatively inexperienced.

The acquisition will be done by Hector Pascoe, a subsidiary of James Pascoe, and is subject to normal preconditions, including landlord consent and confirmation of finance.

Formed in 1906 by James Pascoe, the company started with one store in Auckland. Now under the management of Pascoe's granddaughter Anne Norman and husband David, James Pascoe (the company) has 135 stores including Pascoes the Jewellers and subsidiaries Stewart Dawson Jewellers and Australian company Prouds the Jewellers.

Both F&P and Pascoe are understood to be financing the acquisition through bank debt. This is likely to please F&P investors due to a perception the company's balance sheet is currently undergeared.

Mr Bongard said the transaction, due for settlement in a few weeks, would even up debt to equity without straining the balance sheet. "We're still reasonably conservatively geared but nonetheless within a comfortable range."

F&P expected the acquisition to be EPS (earnings per share) neutral on a normalised basis after funding costs and amortisation of goodwill during the first year after separation.

Mr Bongard said the immediate focus was getting the synergy gains out of the transaction.

"There's a bit to swallow before we start thinking about 'where to' next."

F&P Appliances has also signed a three-year agreement with home appliance giant Whirlpool UK to distribute and market F&P products in England, Scotland and Wales.

The announcement followed a strategic alliance with Whirlpool US earlier in the year.

"We now have a consistent distribution strategy throughout Europe with Whirlpool taking F&P branded products to the market," Mr Bongard said.

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