Wesfarmers, Woolworths hardware battle

Shares in Wesfarmers fell 6 per cent today after Woolworths announced plans to take on the Bunnings business through the takeover of hardware group Danks Holdings.

Woolworths plans to enter the domestic hardware market through a takeover of Danks Holdings, which supplies the Thrifty-Link business and others.

"Wesfarmers had it all their own way with the Bunnings Warehouse business ... and the fact that Woolworths are now moving in to that space with the potential acquisition of Danks then that is clearly creating some competitive concerns," Macquarie Private Wealth client advisor David Halliday said.

However, Wesfarmers's lucrative hardware chain Bunnings Warehouse says it will "relish" competiting with rival Woolworths, which plans to move into the home improvement space.

Bunnings managing director John Gillam said in a statement that the business "relishes the opportunity to compete with any new entrant in the $36 billion Australian home improvement and outdoor living market".

"That market has grown slightly faster than GDP (gross domestic product) over the past two decades and we expect this rate of growth to continue," Mr Gillam said.

"Today's announcement of plans to bring a new player into the industry is no real surprise as these broad intentions have been known to us and many others for at least the last six months.

"We have succeeded by being customer-focused, by providing the widest product range at lowest prices and by delivering the offer with unequalled service.

"We constantly innovate and improve and are determined to keep delivering customers the best offer."

Woolworths chief executive Michael Luscombe said the Australian home improvement sector was under-serviced.

"There is a real opportunity to increase the overall size of the sector and this significant new distribution and retail investment should be positive for both customers and the industry alike," Mr Luscombe said in a statement.

Shares in Wesfarmers, which went ex-dividend on Tuesday, were down $1.61, or 6.12 per cent, at $24.70 at 1411 AEST.

Woolworths was up 3.18 per cent, or 89 cents, at $28.90 at 1428 AEST.

At the same time, shares in Danks had soared $5.32, or 64.88 per cent, to $13.52.

"The market is concerned about a new competitor in the space," Mr Halliday said.

"Woolworths has shown themselves as a very worthy competitor in food and more recently liquor and hotels and the fact that they are moving in to that space is enough to concern the market about how Wesfarmers might respond."

Mr Halliday said the fact that Wesfarmers was trading ex-dividend on Tuesday was also weighing on the shares.

Woolworths has entered into an agreement with US home improvement retailer Lowe's Companies Inc to buy Danks, and the offer has been unanimously recommended to Danks shareholders by the company's board.

The Woolworths and Lowe's joint venture is offering $13.50 per Danks share, valuing the company at $87.6 million.

Wesfarmers reported last week that Bunnings was a key driver behind a 44 per cent surge in 2008/09 net profit to $1.535 billion.

There are currently 233 Bunnings stores across metropolitan and regional Australia and New Zealand, and the company plans to open another 30 to 40 Bunnings Warehouse stores in Australia in the next three years.

According to market research by IBISWorld Australia, Mitre 10 is the dominant player in the nation's hardware sector.

Mitre 10 says it is well positioned to tackle increased competition in the market and that it was been in talks about an equity investment.

"Our business plan has always assumed the possible entry into the sector of a second supermarket chain such as Woolworths, so this news today does not come as a surprise," Mitre 10 chief executive Mark Burrowes said in a statement.

"In preparing for such a move, we have been in serious discussions for some time around equity investment in the group in order to improve our balance sheet and provide even greater value to our shareholders, and we will continue down this path."

Mr Burrows said Mitre 10 has cut costs, improved inventory systems, stabilised its accounts and worked hard at strengthening relations with suppliers.

Mitre 10 has around 500 stores nationally and employs more than 6,000 people.

Mr Burrows said the entry of Woolworths could potentially result in further growth.

This was because the independently-owned Home Hardware and Thrifty Link stores supplied by Danks which did not want to be part of a national supermarket chain could be encouraged to join the Mitre 10 network.

"We are well placed to take on this new challenge," he said.