May 24 (Bloomberg) -- Woolworths Ltd., Australia's second- biggest retailer, is in talks to buy Foodland Associated Ltd.'s New Zealand supermarkets, valued at as much as $1.6 billion, to become New Zealand's biggest grocer, people familiar with the situation said.

Buying the Foodland unit would give Sydney-based Woolworths Chief Executive Roger Corbett 150 supermarkets whose average sales are rising at twice the pace of his Australian stores and 55 percent of New Zealand's grocery market. An announcement may come as soon as today, said the people, who spoke on the condition they not be named.

Perth-based Foodland has been looking for a buyer since Metcash Trading Ltd. offered to purchase its Australian unit on Dec. 6, and said it would spin off the New Zealand operations into a separately listed company. Woolworths and its main rival, Coles Myer Ltd., already control about half of Australia's A$70 billion ($53 billion) annual market for food, liquor and groceries, limiting opportunities for growth at home.

``Woolworths is a logical owner of the Foodland'' unit in New Zealand, said Jason Teh, who helps manage the equivalent of $4 billion at Investors Mutual in Sydney. ``There's more synergies for them than any other player. The New Zealand asset is the jewel in the crown.''

Woolworths spokeswoman Clare Buchanan declined to comment. ``There is no comment I can make,'' said Foodland spokesman Chris Bennett. Tim Allerton, a spokesman for Metcash, didn't comment.

UBS AG is advising Woolworths. Foodland is being advised by ABN Amro Holding NV. Deutsche Bank AG is advising Metcash.

Caroline Gurney at UBS in Sydney and Matthew Sullivan at ABN Amro didn't return calls to their office seeking comment. Kate Abrahams, a spokeswoman at Deutsche Bank declined to comment.

Faster Growth

Foodland's New Zealand sales rose 11 percent in the fiscal third quarter, almost double the pace of Woolworths's Australian food and liquor sales.

The purchase would be the second in seven months for Woolworths's Corbett, who last year paid A$1.3 billion for Australian Liquor & Hospitality Group, cementing his company's position as the nation's biggest liquor retailer. It would also be his first overseas acquisition.

Woolworths's growth prospects are constrained in Australia by antitrust regulators. When Dairy Farm International Holdings sold its 287 Australian stores in 2001, the Australian Competition & Consumer Commission ordered that at least two-thirds be sold to independent owners. The ACCC allowed Woolworths to buy 67 supermarkets, half the number Corbett had sought.

Foodland Value

The New Zealand business is worth between A$1.9 billion and A$2.1 billion, Foodland adviser Grant Samuel & Associates said in March.

Buyout firms including Pacific Equity Partners may also be interested in the New Zealand unit, the people said. Paul McCullagh, a managing director at Pacific Equity Partners in Sydney declined to comment.

Metcash Chief Executive Andrew Reitzer said Dec. 6 that buying Foodland's Australian business would allow him to complete a national wholesaling network, helping him win new customer such as cinemas and other companies that want nationwide contracts.

Reitzer is also seeking to increase his bargaining power with consumer-goods makers to pass on savings on to his customers to help them compete with Woolworths and Coles Myer in Australia.

Woolworths shut its eight-year-old grocery wholesale business in August 2002 after losing its largest single customer to Metcash.

Metcash's first-half sales to supermarkets rose 4.3 percent to A$2 billion. Woolworths' first-half sales were A$16.4 billion. Metcash reports second-half results today.

Metcash earlier this month increased its offer for Foodland's Australian unit by 30 percent to between A$8.91 and A$9.41 in cash and stock a share, after its initial bid was rejected as too low.

Trading Halt

Shares of Foodland and Metcash were halted from trading yesterday. Metcash said in a statement to the stock exchange that 10 days of talks had progressed to the stage where a trading halt was needed. Foodland shares closed on May 20 at A$25.25 and have surged 31 percent since Metcash made its first bid.

Metcash shares closed May 20 at A$3.38 and have risen 15 percent since Reitzer's opening bid, on optimism the enlarged company will be a more formidable competitor in Australia. Woolworths's shares rose 2 percent yesterday to A$15.62, doubling their year-to-date gain.

The trading halts fuel ``expectation that Metcash is going to announce its agreement to buy the Australian operations of Foodland,'' Marcus Padley, a trader at brokerage Tolhurst Noall Ltd. in Melbourne, wrote in a note to clients.

``The big debate is what happens to the New Zealand operations and the hope here is that Woolworths will be buying them rather than them being listed separately under Metcash's structure,'' he said.

Metcash wants to get Foodland's Western Australian wholesaling unit and some of Foodland's 80 supermarkets in two other Australian states, according to the purchase plan.

Foodland's Australian stores have struggled to compete on their own against its larger rivals. Foodland's Australian supermarkets increased sales 0.8 percent in the third quarter, compared with a 4.9 percent increase at Coles Myer and 6.1 percent by Woolworths.

To contact the reporters on this story: Robert Fenner in Sydney rfenner@bloomberg.net; Ambereen Choudhury in Sydney a.choudhury@bloomberg.net.

Last Updated: May 23, 2005 10:01 EDT