Investors gave a strong thumbs up yesterday to Woolworths plan to lighten its involvement in the contentious liquor and gambling industries.
The nations biggest retailer told the market that it planned to combine its drinks and hospitality business, Endeavour Drinks and ALH Group, with the aim of eventually de-merging it in a move similar to the way Coles was spun off by Wesfarmers in late 2018
Woolies said in its statement it expects to separate itself from the combined business next year.
The news saw the shares jump 2.7% to $33.82 after touching a high of $34.24 in trading. At yesterdays close the shares are still around a dollar under the all-time high hit in May of $34.84.
Woolies, in fact, surprised the market with the news that it will merge Endeavour Drinks, which includes Dan Murphy’s and BWS, with the hotels and gaming-focused ALH Group by the end this year to create a stand-alone business called Endeavour Group.
“Following the combination, Woolworths Group intends to pursue a separation of the business through a demerger or other value-accretive alternative … in the calendar year 2020,” the company said on Wednesday.
Woolworths did not say whether it plans to sell or list the new business, although it does expect to retain a minority shareholding whichever route it takes. Wesfarmers retained a 15 percent stake as Woolworths’ fierce rival listed on the ASX.
Analysts say it would make no sense to keep the business because of the continuing and growing adverse publicity about alcohol and especially poker machines. Anti-gambling groups yesterday warmly greeted the news from the retailer.
“The board believes that a merger of Endeavour Drinks and ALH followed by a separation, is in shareholders’ best interests and will benefit customers and team members of both groups,” Woolworths chairman Gordon Cairns said in the statement.
Endeavor Drinks and ALH together were responsible for more than 30% of Woolworths’ earnings in the 2017-18 financial year, with Endeavour Drinks the retailers’ second-largest contributor after Australian supermarkets in terms of both sales and earnings.
Woolies which has already offloaded its petrol business said the separation will create a simplified structure and a greater focus on its core food and everyday needs markets.
The integrated Endeavour Group will be a substantial business in its own right with more than 1500 BWS and Dan Murphy’s retail drinks outlets and 327 ALH hotels.
Other businesses to be included in the merger include Endeavour Drinks’ own brands business, Pinnacle Drinks; Langton’s, a fine wine auction and retail business; Cellarmasters, a wine subscription business; and an 8.7% in ALE Property Group.
No one knows valuations yet but you can bet that a big capital return will be on the cards in 2020, as well as higher investment in the supermarkets’ businesses here and in NZ.
With the spin-off of Coles, it will mean investor choice in the retail sector will have expanded enormously next year if the drinks and pubs business follows Coles down the IPO route.
That can only be good for consumers and good for investors.
