Applause from investors yesterday for Woolworths (WOW) announcement plans to pull the plug on its Masters loss-making home improvement business after buying out US joint venture partner Lowe’s Companies Inc for an as-yet-undisclosed price.
Woolworths chairman Gordon Cairns surprised with an early morning announcement of the decision which revealed plans to buy out Lowes 33% stake and then either sell or wind up the home improvement business, which has lost more than $600 million over the last four years and seen over $3 billion invested in the project.
The business lost $245 million in 2014-15 and was on track to at least lose as much this year. Tradelink and Home Hardware businesses though are profitable and could be sold separately.
There are 63 Masters’ stores across the country and Woolies was in the process of reformating them to a more focused hardware offering.
As a result of the news, Woolies shares had a solid trading session on the ASX, leading other retailers higher (helped by more details on Wesfarmers’s $705 million move into the UK home improvement market).
Woolies shares closed up 4.3% at $23.65, after peaking at $24.45.
WOW 1Y – Woolworths to pull plug on Masters
A market wide sell-off which topped 90 points at one stage in the morning made the performance yesterday of Woolies (and Wesfarmers and Metcash) shares even more solid.
The sell-off eased in afternoon trading and the ASX 200 ended a tough day down just 0.7%, or 34.1 points, when the early indications had been for a fall of 1.8% or more. Helping our market was a small gain for the volatile Chinese market ahead of the release later today of final economic data for 2015 and the December quarter.
Mr Cairns said the company’s decision follows the completion of a strategic review of the home improvement business, which includes Masters and Home Timber and Hardware, and Lowe’s move to exit the business by exercising its put option.
"Our recent review of operating performance indicates it will take many years for Masters to become profitable," said Mr Cairns.
"We have determined we cannot continue to sustain ongoing losses from this business," he said.
"As a result of our engagement with Lowe’s, it has advised us that it intends to exercise the put option which is available to it under the joint venture agreement. The agreement requires this to happen before Woolworths may exercise its call option.
“Following the exercise of our call option, we intend to pursue an orderly prospective sale or wind‐up of the business," Mr Cairns said.
This will enable full ownership of the business by Woolworths in a shorter timeframe and give the retailer access to the widest range of exit options, Mr Cairns said.
Details of the hit to Woolies accounts will be released in the financial report to be released in late February.
This will include the price paid to Lowes and the extent of write-downs on the business.
But the move is what big investors and analysts have wanted Woolies to do – any decision to keep Masters would have resulted in a new round of doubt about the board and management.
The Masters decision will make it easier to recruit a new CEO and will likely see Woolies shares upgraded by retailing analysts.
That will be welcomed by Woolies small shareholder dominated base of around 245,000. In early 2014, Woolworths had a market value of $48 billion and riding high – by last Friday it had fallen to $29 billion as the Masters losses and problems added to the feeling the retailer had lost touch with consumers and was losing sales and profits to rival Coles.
