Wesfarmers investors left with $1.4bn bill after UK Bunnings offload
Wesfarmers' foray into the United Kingdom and Ireland home improvement market has come unstuck as the company announces the sale of Homebase UK to a private equity firm.
Wesfarmers' foray into the United Kingdom and Ireland home improvement market has come unstuck as the company announces the sale of Homebase UK to a private equity firm, which Morningstar estimates will cost shareholders more than a billion dollars.
After weeks of speculation, Wesfarmers (ASX: WES) confirmed the buyer as British restructure specialist Hilco Capital, which agreed to buy the DIY chain for "a nominal amount". The company said the transaction would result in a loss of up to $400 million. Morningstar analyst Johannes Faul estimates the venture has cost shareholders in total about $1.4 billion over just two years.
Wesfarmers' 2016 Bunnings United Kingdom and Ireland (BUKI) acquisition suffered in the wake of the Brexit decision and the subsequent deterioration of Britain's economic outlook.
Newly appointed Wesfarmers managing director Rob Scott sought to reassure shareholders despite conceding the company had underestimated the importance of local knowledge.
"The investment has been disappointing, with the problems arising from poor execution post-acquisition being compounded by a deterioration in the macro environment and retail sector in the UK," Scott said in an announcement to the ASX on Friday.
"The divestment is in the best interests of Wesfarmers’ shareholders and will support the ongoing reset and repositioning of the Homebase business."
Under the terms of the agreement, Hilco Capital will acquire all Homebase assets, including the Homebase brand, its store network, freehold property, property leases and inventory. The 24 existing Bunning pilot stores will convert to the Homebase brand.
Faul said that the divestment would at least offer a return to certainty for investors. Morningstar’s fair value estimate remains unchanged at $37.50. Wesfarmers' divestment from Homebase UK should be completed by the end of fiscal 2018.
"The key positive from the divestment of BUKI is closure of an unsuccessful attempt to export the Bunnings chain to Europe, giving investors certainty of what would have potentially been a money pit -- especially if no takers for the material operating leases had been found," Faul said.
"BUKI’s annual lease costs are about £200 million, and outstanding lease obligations are around £1 billion. The ultimate downside, an outright closure of Homebase, has been avoided, with Hilco Capital agreeing to acquire all Homebases assets, including the property leases."
Wesfarmers is the latest in a string of Australian companies whose offshore ventures have faltered. ANZ (ASX: ANZ) is retreating from its ambitious overseas operations, continuing to close retail and wealth businesses across the Asia-Pacific region.
Tabcorp (ASX: TAH) is similarly struggling to replicate its local success offshore after launching an online wagering business Sun Bets in the UK, in a partnership with News UK. The division posted a $24 million EBIT loss during the first half of fiscal 2018, and given the unsatisfactory performance, Morningstar analsysts say could lead to a termination of the venture within the coming year.
Other examples include QBE Insurance Group's (ASX: QBE) sale of its loss-making Latin American operations, NAB’s (ASX: NAB) exit from the US and UK market, and the collapse of ABC Learning after expanding rapidly into the NZ, UK and US.
Ironically, Wesfarmers' invasion of the UK occured the same year Woolworths (ASX: WOW) divested from its failed attempt to roll out the Masters hardware chain here with US-based joint venture partner Lowe's.
Monash University BehaviourWorks PhD candidate Conor Wynn suggests that Australian companies fail in their overseas expansions because their business models fail to account for differences in consumers' habits.
"Research shows that over time consumers build up habits. These habits influence what people buy, when and where," Wynn writes in The Conversation.
"Simply copying and pasting what works in one location (such as a huge hardware warehouse) without adjusting for local circumstances (different competitors, services and customer preferences) is very risky."
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Emma Rapaport is a reporter for Morningstar Australia.
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