Woolworths announces B2B plan, invests in PFD Food Services – what does it mean for ECEC?

Many early childhood education and care (ECEC) services were left reeling earlier this year, as “panic buying” led to supply issues, meaning menus had to be rapidly changed, alternatives to popular staples had to be found, and challenges of product limits on orders had to be negotiated. 

As a result of these challenges, many providers looked into alternative delivery models, and expressed their concerns to major suppliers, such as Coles and Woolworths. 

Now that the COVID-19 impact is beginning to be more deeply understood, Woolworths is making moves to respond to the challenges, announcing a strategic investment in PFD Food Services, with reports that the grocer is also looking into a direct supply model to schools, childcare centres and retirement villages under a food services business-to-business (B2B) platform that aims to have revenue of $1 billion in three years.

The strategic partnership with PFD Food Services has been expanded by The Woolworths Group, who have acquired a 65 per cent equity interest, with the Smith family retaining 35 per cent. The total purchase price for the 65 per cent equity interest and freehold properties was $552 million (excluding net debt). 

PFD will continue to operate as a standalone business, retain a senior leadership team and partner with Woolworths Group to deliver better experiences for customers. The freehold properties outlined in the acquisition primarily comprise of 26 distribution centres.

“This investment is a logical adjacency for Woolworths Group and further supports the evolution of the Group into a Food and Everyday Needs Ecosystem. It will build on our existing partnership with PFD, the number two player in the large and fragmented out-of-home foodservice and non-retail business-to-business markets,” Woolworths Group CEO, Brad Banducci said.

Reporting delivered through local Queensland news sources such as The Townsville Bulletin quotes a Woolworths spokesperson saying that the current model of supply, whereby ECEC services and adjacent businesses shop for key groceries such as toilet paper, cleaning products and food via the consumer website “doesn’t work as well as it should for them or us”.  

“We believe they would benefit from having a dedicated website, consolidated invoicing and easy-to-use expense reporting,” the spokesperson added. 

The transaction is subject to Australian Competition and Consumer Commission (ACCC) approval and the satisfaction of customary closing conditions, with completion expected by the end of calendar year 2020.

Transaction details

Woolworths Group will initially invest $302 million in PFD to acquire a 65 per cent equity interest. The transaction implies a multiple of 11x pre-AASB 16 EBITDA  of $57 million assuming net debt of $157 million. Woolworths Group will also acquire PFD’s freehold distribution centre properties for $249 million which will be leased back to PFD.

The transaction is subject to an earn-out at the end of FY22 and FY23 if earnings growth materially exceeds the business plan. Put and call options have also been granted to the Smith family and Woolworths Group respectively over the Smith family’s remaining 35 per cent shareholding, exercisable from the third anniversary of completion.

The transaction is subject to ACCC approval and the satisfaction of customary closing conditions with completion expected by the end of calendar year 2020. The purchase price will be funded from existing cash reserves and available debt facilities and is not expected to affect the Woolworths Group’s existing credit metrics.