Wesfarmers Ltd offered to buy Homebase in the UK for £340 million ($489 million) as the Australian conglomerate attempts to secure an overseas foothold for its home-improvements business.
The cash purchase from Home Retail Group Plc would give Wesfarmers 265 home-improvement stores, the second-largest in the UK, and be the first step in a multi-year plan to roll out the Perth, Australia-based retailer’s Bunnings-branded business. Wesfarmers has carried out some due diligence and the process is being finalized, it said in a filing Thursday.
Wesfarmers is picking Bunnings, the industry leader in Australia and New Zealand, as the vehicle for the group’s first major expansion offshore. While profit margins at Bunnings dwarf those of Homebase, creating space for improvement, the company is following peers including Kathmandu Holdings Ltd and National Australia Bank Ltd that have struggled away from home.
“Any time an Aussie company ventures overseas, it’s fraught with risk,” said Daniel Mueller, an analyst at Morningstar Inc in Sydney. “But if they can get a little bit of operating efficiency, there’s certainly scope for a lot of upside.”
Shares of Wesfarmers, which also owns the Australian supermarket chain Coles, fell 1.4 per cent to A$39.40 in Sydney, giving the company a market value of A$44 billion.
The Homebase deal has a multiple of more than 20 times of EBIT, compared with a median of 11 times from acquisitions of 10 UK retailers announced in the last 12 months, according to data complied by Bloomberg.
Wesfarmers said the Homebase stores are the right size for a low-cost operating model. Bunnings has 338 stores and its annual revenue of A$9.5 billion ($6.6 billion) is about triple that of Homebase.
Homebase on Thursday reported a 5 per cent gain in like-for-like sales in the quarter ended January 2, fueled by kitchen and bathroom products, compared with the 5.4 per cent increase estimated by analysts. The chain generated operating profit of just £26.3 million in the year ended August 29, 2015, while Bunnings made A$1.1 billion of operating profit in its latest fiscal year, according to Wesfarmers.
“Homebase delivers an established and scalable platform,” Wesfarmers said in the statement. “The UK home-improvement and garden market is an attractive and growing market.”
In a statement Wednesday, Home Retail said Wesfarmers had completed a detailed review of Homebase and the companies are closing in on a transaction.
Homebase has struggled as online shopping siphons demand from physical stores. The home-improvement chain has grown annual revenue just once over the last five years and is in the midst of a plan to close about 80 outlets to help cut costs.
“This deal would represent good value for shareholders," Home Retail Chief Executive Officer John Walden said in the release.
Should a deal for Homebase be reached, Home Retail plans to return about £200 million to shareholders and contribute £50 million to its pension scheme. The company would retain about £15 million of the proceeds after incurring restructuring costs related to the deal.
Home Retail is scheduled to report details of its Christmas trading on Thursday and will hold a call for investors at 8:30 am London time.
Photo courtesy of Home Retail Group
News by Bloomberg, edited by ESM. To subscribe to ESM: The European Supermarket Magazine, click here