Woolworths, Lowe's Exit Unprofitable Home Improvements Unit

  • Lowe's is exercising right to force Woolworths to buy stake
  • Woolworths stock surges as much as 7.9 percent in Sydney

Woolworths Ltd. and Lowe’s Cos are exiting their unprofitable Australian home-improvements venture after a failed six-year attempt to take on market leader Bunnings Ltd.

U.S. hardware chain Lowe’s, which owns 33 percent of the venture, is exercising its right to force Woolworths to buy the stake. Woolworths will then sell or close the unit, which had net assets of A$2.8 billion ($1.9 billion) and was losing around A$200 million a year, the Australian company said Monday.

Woolworths shares surged in Sydney as investors preferred the cost of an exit to years of further losses at the Masters venture, little known compared with the heavily promoted Bunnings chain. The decision to quit leaves Woolworths free to focus on supermarkets, liquor and discount stores at the start of a multi-year turnaround plan.

“They’ve done pretty much everything they can do to try and get this to work,” said Andrew McLennan, an analyst at Commonwealth Bank of Australia in Sydney. “It hasn’t proved to be successful.”

Woolworths climbed 4.6 percent to A$23.71 at 1:36 p.m. in Sydney, swelling the company’s market value to A$30.1 billion. The stock earlier rose as much as 7.9 percent.

Valuation

Woolworths valued Lowe’s put option as an A$886.5 million liability in its 2015 annual report. Woolworths said Monday it’s now reviewing the value of the venture, which operates both the Masters and Home Timber & Hardware outlets. 

Just as Woolworths accepts defeat in the Australian home-improvements market, the winner is taking its model offshore. Perth-based Wesfarmers said Monday it’s buying Homebase in the U.K. for 340 million pounds ($485 million) to secure an overseas foothold. Wesfarmers plans to invest an additional 500 million pounds to expand Bunnings in the U.K. and Ireland over three to five years.

Woolworths investors still face uncertainty. It will take at least two months for Woolworths to take up full ownership of the Masters venture, partly because Lowe’s stake is subject to an independent valuation, Chairman Gordon Cairns said in the statement Monday. The venture has 63 stores and 7,000 workers.

Cairns, who said he’s still looking for a new chief executive officer to replace outgoing boss Grant O’Brien, said it’s too early to speculate on the value of the division. There’s been no takeover interest in the business in its current form, he said.

“It will take many years for Masters to become profitable,” Cairns, who joined Woolworths only in September, said on a conference call Monday. “We have determined we cannot continue to sustain ongoing losses from this business.”

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