Wesfarmers (WES) shares ended higher yesterday in the wake of the Woolies announcement and a separate announcement giving more details on the purchase of the Homebase do it yourself (hardware) chain in the UK for $705 million.
Wesfarmers shares rose 2% to $40.12 on the ASX yesterday as investors gave the deal another thumbs up.
It is a sign that Bunnings has outgrown its Australasian markets and can’t expand further here without running into growing competition problems.
The deal was first signalled last Thursday and Wesfarmers yesterday revealed its offer had been accepted by the directors of Home Retail group, the owners of Homebase.
Wesfarmers has plans to roll out its Bunnings hardware brand to the UK within five years.
Homebase had revenue of £1.5 billion ($A3.1 billion) for the 12 months to August 29 last year and has 265 stores.
Wesfarmers said it will spend more than $1 billion rolling out the Bunnings hardware brand in the UK (which will be watched closely by analysts who are sceptical that Australian companies can handle investment in the UK).
IAG (insurance), AMP (insurance and funds management), Fosters and John Elliot, Alan Bond (beer and TV), the Packer family (casinos) and other groups have lost heavily in badly managed expansion moves to Britain in the past 30 years.
NAB is now trying to quit the UK after wasting billions of dollars there on an expansion dating back to around 1987.
But Rupert Murdoch and News Corp have done the move successfully in newspapers and TV.
The 265 stores Homebase stores will transfer to Bunnings, starting with a “handful” of pilot stores.
“Once we have successful pilot stores we will introduce the Bunnings offer more widely… across a three- to five-year period," Wesfarmers managing director of home improvement John Gillam said yesterday.
“Every store will be totally refurbished and transformed and new stores will be added to build the new Bunnings Warehouse network. “We plan to invest approximately £500 million ($1.03 billion) during this period,” he said.
Wesfarmers CEO Richard Goyder said the investment was a "deep step" into the overseas market that increased the company’s risk profile, but one that had been made with "eyes wide open".
"We believe the acquisition of Homebase provides a long-term value creation opportunity for Bunnings, which will complement the strong growth trajectory for Bunnings’ Australian and New Zealand businesses," Mr Goyder said.
Mr Goyder said he hoped Bunnings in the UK would achieve an 18% return on capital within three to five years.
Meanwhile Metcash shares jumped nearly 8% yesterday to $1635 on the news from Woolies and further details of the Bunnings move.
Masters problems will relieve the pressure on Metcash’s Mitre 10, which is the third hardware chain across the country and any closure of Masters will be a very big positive for Metcash.
And with Bunnings and Wesfarmers management focusing on the UK for the next three to five years, that will also ease the intense market pressure on Mitre 10 from the sector’s 1000 pound gorilla, or so the thinking from hopeful shareholders went yesterday.
