IN A move that will give scale to its lacklustre Australian business, Woolworths yesterday said Country Road, its 88%-owned subsidiary, will acquire 40-year-old fashion retailer Witchery Group from Gresham Private Equity for A$172m ( R1.5bn).

Woolworths CE and Country Road chairman Ian Moir said the benefits of the deal included stronger negotiating power with landlords and a streamlined supply chain.

The Witchery Group consists of Witchery and Mimco, which operate 210 stores and concessions in Australia, New Zealand and Singapore.

"This acquisition is immediately value-accretive to Country Road. It's a very positive move for the Woolworths business, as a majority shareholder in Country Road. It represents a far better return than cash sitting in the bank would at the moment," Mr Moir told Business Day.

The Witchery transaction is expected to deliver synergies of about A$10m, annualised, to be achieved over four years, Country Road said.

Jeanine Womersley, an analyst at Renaissance Capital, said the Country Road division was margin-diluting to the group.

"We have often questioned its strategic fit in the Woolworths stable. We think Witchery's two brands, Witchery and Mimco, could provide the solution to this, with the acquisition bolstering Country Road sales by a further 60% (A$266m) and, more importantly, being immediately margin-enhancing to the group," Ms Womersley said.

Witchery was launched in SA through concession stores in Stuttafords in November 2010.

"Obviously we'll have conversations with Stuttafords. There is an agreement in place that doesn't cover all the territories or both brands," Mr Moir said.

Ms Womersley said: "With Witchery and Mimco being international brands, this could bolster the Country Road and Trenery offerings in SA, in turn improving the competitive edge of the Woolworths SA business, particularly with Zara, Cotton-On and Topshop's foray into SA."

The acquisition will be funded through a new A$92m five-year bank facility and a capital raising which will allow shareholders to buy one new share for every two existing shares at A$2.66. Woolworths will take part in the capital raising and contribute about A$81m of new equity.

Stephen Kulmar, a retail consultant at Retail Oasis, said Country Road had received a bargain, as the Witchery Group was "worth north of A$220m".

"Gresham Private Equity has been keen to exit for the last 18 to 24 months. Although Witchery was acquired for A$180m, Mimco was acquired for A$40m and the business is about 50% larger, with substantial store openings over the last five years. So Gresham's return is not great," he said.

mooradz@bdfm.co.za