Wesfarmers Believes Bigger is Better

Wesfarmers [ASX:WES] is one of Australia’s largest retailers. And they are in constant competition with their rivals Woolworths [ASX:WOW].

Just some of the names under WES include Coles, Bunnings, Officeworks, Target and Kmart. It seems like they have all the major players. Yet WES aren’t content with their collection.

Newsfeeds have caught wind of WES attempting to make a move on UK DIY chain, Homebase. WES is close to acquiring Homebase from owners, Home Retail Group [LSE:HOME], for $724 million. Talks about the possible takeover started in September last year. WES would buy the entire Homebase business. Including stores and all dedicated distribution centres.

But why a UK DIY chain and why now?

The downfall of home retail

HOME is much the same as WES but British-based. And Homebase is equivalent to Bunnings. Yet there is one difference between HOME and WES. HOME’s market performance is struggling.

In October last year HOME’s share price tumbled almost 16%. Concerns surrounding the Christmas trading period and what it might mean for profits surfaced. It was expected that HOME’s profits would be towards the bottom end of forecasts.

These concerns now seems obvious don’t they?

WES is interested in entering the British market. It’s in an industry it knows well. Combined with HOME’s struggling performance, WES has the added advantage of buying a cheap Homebase. But what if Homebase is a crash and burn business contributing to HOME’s poor performance?

Even though HOME had suffered profit losses, business was still profitable. HOME had substantially increased their pre-tax profits at the same time profit expectations were revised down. And it was on the back of companies just like Homebase.

Home Retail would rather focus on other projects

It’s likely that an agreement will be reached between WES and HOME. The only thing left to discuss is price. HOME is now solely focused on increasing shareholder value, while transforming their core businesses.

HOME’s chief executive, John Walden believes ‘this deal would represent good value for shareholders and a growth opportunity for the Homebase business and its colleague.’ But this just sounds like a PR speech. What I hear is: profits are struggling therefore we need to selloff the Homebase business to exceed upcoming profit expectations.

Walden commented on the possible takeover further:

The sale would allow the group to focus on Argos and its Transformation Plan, with an improved balance sheet and financial position, which I believe represents an even greater opportunity for building long-term shareholder value.

So it seems I’ve judged too quickly. HOME wants to sell off its Homebase business to improve their balance sheet, removing debt likely. But HOME plans to focus on other businesses under management.

Regardless, HOME has said sale documents are in progress to be completed. If successful, you can bet WOW will be feeling the pressure. Why?

It was not too long ago that WOW had tried to establish their own home improvement business, the Masters project. But after Masters failed horribly, WOW will have to contend with WES who now has a possible two DIY businesses under management.

What to do about Wesfarmers shares?

WES share price had a rocky 2015, but generally weakened over late October to early December. The Christmas trading period was key for WES recouping the losses experienced in the latter months of 2015.

For the New Year shares have dipped 6.84% from their Christmas high. But this generally has more to do with the entire market trending down rather than the poor individual performance.

As for the Homebase acquisition, I believe it’s a great move for WES. Homebase is the second largest home improvement and garden retailer in the UK.  And will be an important factor moving forward for the year.

Härje Ronngard,

Junior Analyst, Money Moring

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