The move by Wesfarmers boss Richard Goyder to spend $700 million to get a foothold in the British home improvement market brings with it some geographical risk – given the record Australian companies have buying overseas assets.
But the size of the investment relative to the West Australian conglomerate's $46 billion market capitalisation means he is not betting the farm and Wesfarmers' experience and stellar track record in running Bunnings must mitigate much of the downside.
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Wesfarmers seeks $700m Homebase in the UK
Wesfarmers confirms its plans to expand Bunnings offshore with a $700 million bid for UK-based DIY retailer Homebase.
Indeed the acquisition of 265-store Homebase chain is at the polar opposite end of the risk spectrum to Wesfarmers previous big foray into retailing – the 2007 purchase of the Coles Group for $22 billion.
That deal – which went pear shaped thanks to the intervention of the global financial crisis – was one that financially damaged Wesfarmers for years, until the businesses, including Coles supermarkets, Kmart and Target were ultimately turned around.
Since that time Wesfarmers has undertaken very few acquisitions and has been a net seller of assets, including its insurance business.
The Homebase deal has not yet been completed but it certainly looks close enough that the formal completion should not be far off.
While the scale of the purchase is small relative to the Coles Group, it is true to form in that it involves the transformation of a underperforming business and creates upside value.
The Wesfarmers modus operandi is to buy cheap and add value, then sell if offered a ridiculous amount of money.
There looks to be plenty to improve upon in the case of Homebase, which appears to be the unloved subsidiary of a larger retailer, Home Retail Group plc.
Home Retail Group has itself recently been in the acquisition sights of British supermarket giant Sainsbury's – which has no apparent interest in keeping the Homebase business.
Sainbury's made its approach a few months back and under British takeover law has until February to make a formal offer or walk away.
Either way Homebase looks like it is looking for a new owner.
But the home improvement market in Britain looks quite different to the Australian landscape.
Wesfarmers said it would rebadge the British stores as Bunnings but whether their stock will closely replicate the model in Australia remains to be seen.
Wesfarmers has had front row seats in watching how not to transplant a home improvement business from one culture to another without a mind to market variances as it watched US operator Lowes team up with Woolworths to create Masters in Australia.
It appears that under the Bunnings banner the strategy would be to use what are said to be good-sized and well-located stores to expand the chain further in Britain.
''Homebase delivers a an established and scalable platform, with stores that are the right size for the UK market and support warehouse merchandising and a low cost operating model,' Wesfarmers said on Thursday.
Currently the British home improvement market is quite fragmented and competitive and Homebase sits as the number two or three operator, with the largest in the market being B&Q – whose parent Kingfisher plc also operates home improvement brands across Europe.
Retail analyst Phil Kimber from Evans and Partners notes that Homebase's operating profit for 1H16 (six months to August 15 2015) was £34m – more than full-year FY15 profit of £20 million.
He said that while ''the multiple looks high – margins are very low and the business is currently going through restructure/store rationalisation. Simply annualising the 1H16 result suggests only 5x operating profit multiple [but this assumes no seasonality, which is unlikely].''
But the British store has margins of between 1-2 per cent, compared with Bunnings' margins of 10 per cent.
Homebase made £41 million operating profit in the 2010 financial year and £48 million in 2011.But its sales have been declining given store closures and it reported revenue of £1.46 billion for the year ended August 2015.
Grant Saligari from Credit Suisse said in a note to clients that Homebase has very low sales densities (c£100psf), offset by prices and gross margins that are probably on the high side. Staff densities and probably service levels have been significantly reduced in recent years.
This foray offshore represents a big opportunity for Bunnings boss John Gillam to expand his empire. Bunnings is already the second largest business – after Coles supermarkets – within the Wesfarmers empire.
Given the deal has not been finalised, Wesfarmers has not furnished the market with any information on how the deal is to be funded. Nor do we know how much will be spent on transforming the business or expanding it.
If Wesfarmers' placement of its toe into the international market is successful, it could present the conglomerate with far more opportunities given the size constraints of the Australian market.