Nisa-Today's has rejected a buy-out offer from Bibby Line, which owns Costcutter, Nisa's biggest member. But was it a good move? Peter Cripps reports


When Nisa-Today’s biggest member, Costcutter, made a bid to acquire its buying group in 2006, valuing it at around £100m, it ended in in-fighting, turmoil and a £2m legal bill.

Three years later, history is repeating itself, with Costcutter’s new owner Bibby Line offering £51m. Despite the recession slashing tens of millions from company valuations, the offer was rejected on the grounds that it “undervalued the business”.

Nisa seems determined to maintain its stance. But is it in danger of losing its biggest customer? Nisa and Bibby are closely linked and have grown in unison. As well as being the majority owner of Costcutter, Bibby operates Nisa’s ambient warehouse and distributes the goods from it. But their 27-year relationship is now starting to look strained.

Nisa recently put the £75m-a-year contract for the combined distribution of its ambient, chilled and frozen goods between 2011 and 2018 out to tender. Although Bibby made the final two companies shortlisted, Nisa is believed to have offered the contract to DHL – a snub that industry sources say could have massive ramifications for Nisa’s future. 

Costcutter, which is 51% owned by Bibby, is only contracted to order through Nisa until 2014, after which Bibby could take it away. For Nisa, this would mean the loss of about 40% of its turnover.

As one veteran wholesaler delicately puts it: “Nisa would be in the shit without Costcutter so it is playing with dynamite. If it had given Bibby the contract, it would have effectively secured the future of Costcutter within the group.” 

Keen to stress its independence, Nisa has clearly not given Bibby any preferential treatment when negotiating the distribution contract. Nisa insiders claim Bibby’s offer was not much more expensive than the winning DHL bid, but Nisa took a hard-nosed business decision based purely on costs.

Bibby’s subsequent offer to buy the company had been in the pipeline for a while, but the timing of the submission was prompted by the news Bibby would have to intervene quickly before the distribution deal with DHL had been signed and sealed. In fact, The Grocer has learnt that Bibby put in its offer to buy the company on the same day it learnt of its failure to win the contract. Insiders are convinced Bibby is now trying to buy Nisa in an effort to quash any deal with DHL and secure the lucrative distribution contract.

Now Nisa has snubbed Bibby on both the distribution deal and the buyout in the space of a few days, the real danger for it is that Bibby could sever its relationship in 2014.

“You don’t have to be a rocket scientist to see that’s what might happen – the threat that Nisa might lose Costcutter is implicit,” one Nisa member said.
Nisa CEO Neil Turton says his focus is currently on the next five years. “Bibby has committed in writing not to terminate its Costcutter contract early,” he says. “It is an ethical company and our relationship with the Bibby management is basically pretty good.”


Make or break
But it is not unfeasible that, come 2014, Costcutter, a Nisa member since 1987, could walk away. It has been growing steadily since it was formed in 1986 and has built the number of stores trading under the fascia to more than 1,600. Its sales were up 5.6% to £578m in the year ending April 2009 and it has made no secret of its ambitions to take control of its own buying and distribution. This view is shared by its parent.

“Bibby recognises that Costcutter would have a greater value if it owned its own buying and distribution,” said one wholesale boss. “There are clear synergies for it to buy Nisa. Its range is so limited that it is already big enough to do its own buying, which means it may be able to do without a buying group after 2014.”

However, a Nisa without Costcutter would not be such a solid offering. True, in the year ending April 2009, Nisa’s turnover grew 12% to £1.278bn. It has added £250m of sales since the previous attempted merger, since which Turton says the company has benefited from a period of stability. But the loss of 40% of its turnover would affect its buying power and the prices it could pass on to its members. What is certain is that the next few weeks will be make or break for the long-term relationship between Nisa and Bibby.

After its bid was rejected, Bibby expressed disappointment to the press that its “generous” offer had been dismissed by the board, rather than voted on by the 980 members.

“In the current difficult economic environment, Bibby feels many shopkeepers would be interested in discussing the merits of having access to cash and being part of a stronger and integrated retail group,” said Sir Michael Bibby, MD of Bibby Line Group. “The intention was to create the largest integrated distributor to independent retailers in the UK, with the many mutual benefits this could bring.”


Money matters
Bibby’s deal would potentially pay more than £1,000 a share to members, with a third paid up front and the following two thirds paid after 12 and 24 months on the condition that members maintain volumes.

Because members buy shares for £150, Bibby argued in a press release last week that the deal represented a good pay-out for members, about a third of whom own the maximum entitlement of 100 shares. Turton countered that a members’ vote would have cost £500,000 in legal fees and although Bibby had offered to pay them, that this would undermine the independence of the board. Besides, the offer represented such an undervaluation of the company that it was “weak” enough to dismiss outright, he said.

Since Nisa-Today’s rejection of the bid, Turton says he has received nothing but good feedback from dozens of members who don’t want to lose the mutual status of the company. But as The Grocer went to press it was widely expected Bibby would come back with a better bid and, although there was not enough pressure from members to force a vote so far, next time there could be.

“There’s a lot said about mutualisation, but at the end of the day everything is for sale and if the price is right the members will sell,” says the veteran wholesaler. Turton has worked hard to stabilise Nisa following the last failed takeover. “Really, we didn’t want this at the moment,” he adds.

But whether he wants it or not, that stability is under threat. Even if Costcutter agrees to stay put beyond 2014, a higher offer from Bibby could encourage Nisa members to insist on a vote. If that happens, Nisa could lose its independence and the battle Costcutter lost three years ago will seem a small price to pay for winning the war today.



A SENSE OF DÉJÀ VU
In 2006 Costcutter, backed by Iceland’s Kaupthing bank, put in a bid to buy Nisa-Today’s. It was backed by the board, but many members were not convinced the merger would be in their interests and the Nisa Members Association was formed, a group of traders that campaigned to retain ownership of the buying group.

They complained to the Office of Fair Trading of cartel behaviour, accusing the companies of colluding to stop Costcutter members joining Nisa. The complaint effectively derailed the bid, because it forced the banks to put “unworkable” conditions on the loan. Nisa and Costcutter reluctantly dropped the bid as a result, leaving Nisa with a £2m legal bill.

The OFT subsequently cleared both parties of cartel behaviour.

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