Wesfarmers Bigger Than Tesco Seeks Buyouts With $4.6 Billion

Wesfarmers Ltd., the Australian retailer with a market value that’s bigger than Tesco Plc, is scouring for acquisitions to boost growth as a mining investment boom wanes.

“The challenge is, ‘well, what are you going to do with your money?’,” Ian McLeod, managing director of Wesfarmers’ Coles supermarket chain, said in an interview. “What are you going to expand into?’,” said McLeod, who’ll be assessing takeover targets in a new role at the Perth-based company.

Wesfarmers, which started in 1914 as a farmers’ co-operative with capital of 2,052 Australian pounds, has grown to encompass department stores, chemical plants, coal mines, insurers and an investment bank. With as much as A$5 billion ($4.6 billion) of cash and debt that can be used for takeovers according to Bank of America Corp.’s Merrill Lynch unit, Wesfarmers should invest surplus funds rather than return them to shareholders, said McLeod.

The company, which made a preliminary offer last year in the $4 billion attempted sale of Hong Kong billionaire Li Ka-shing’s ParknShop supermarket according to two people familiar with the matter, will have “an additional cash pool” after an A$1.85 billion sale of insurance businesses, McLeod said.

Investment is the best option for that money, said the executive, who spent six years turning around Coles. He didn’t say whether it was best spent on existing operations or takeovers.

Wesfarmers shares rose the most in more than a week today, breaking a five-day falling streak to climb 0.5 percent to A$41.33 at the close in Sydney. That compared to a 0.3 percent increase in the S&P/ASX 200 index.

Warren Buffett

“What Wesfarmers are very good at is picking distressed asset classes at the time in the cycle when no one wants anything to do with them,” Simon Robinson, a senior wealth manager at Shaw Stockbroking Ltd. in Brisbane, said by phone. “It’s identical to Berkshire Hathaway in terms of its philosophy and the financial disciplines,” he said, referring to the investment company run by Warren Buffett.

A Scottish-born former Wal-Mart Stores Inc. executive and ex-Chief Executive Officer of Glasgow’s Celtic Plc soccer club and Halfords Group Plc bicycle retail chain, McLeod was hired in 2008 to turn around Coles after Wesfarmers bought the chain as part of Australia’s biggest-ever buyout the previous year.

The acquisition transformed the company.

Before the deal, 51 percent of Wesfarmers’ A$9.67 billion in sales came from its Bunnings hardware chain, with another 15 percent from insurance and 12 percent from coal mining, according to data compiled by Bloomberg. In fiscal 2013, Bunnings accounted for just 15 percent of revenue that’d risen sixfold to A$59.4 billion, with Coles contributing 60 percent.

Declining Business

Coles was a “business in decay” in 2007 when the conglomerate bought it along with the Target, Kmart and Officeworks store networks, according to a company presentation.

McLeod promised to revive it by cutting costs for shoppers. Offers of A$1 liters of milk and loaves of bread, drove a price war with market-leading Woolworths Ltd. which Coles won: sales from its stores open at least 12 months have outperformed Woolworths’s outlets for 16 consecutive quarters.

The supermarket’s sales have more than doubled over five years, to A$35.8 billion in the 12 months ended June. The unit’s earnings before interest and tax more than tripled in the period to A$1.53 billion, according to data compiled by Bloomberg and the company’s latest annual results.

The four chains that Wesfarmers bought for A$19.7 billion in 2007 are worth about A$31 billion, Ben Gilbert, an analyst with UBS AG in Sydney, wrote in a February note to clients.

Easy Wins

That will make future improvements harder, according to Michael Simotas, an analyst with Deutsche Bank AG in Sydney.

“The easy wins have been made from Coles and the earnings growth from that business will slow” Simotas said by phone. “They’ll be out there looking for new opportunities.”

From July, McLeod will become Wesfarmers’ Group Commercial Director, with wide-ranging responsibilities including internal projects as well as assessing overseas and domestic takeover targets.

“It will be part of my role to look at where those opportunities might lie,” working alongside group managing director Richard Goyder, McLeod said in a March 26 interview on the sidelines of the Global Food Summit in Sydney. Wesfarmers hasn’t said it’s seeking targets in any particular industry and it’s not set on making a deal, Goyder said in December.

“We are very financially disciplined and in the case of acquisitions we’re also patient,” Goyder said at the time.

Powder Dry

So far Wesfarmers has kept its powder dry. Declared spending on acquisitions since the Coles deal of $129.4 million has been outstripped by $3.54 billion of divestitures over the period, according to data compiled by Bloomberg.

Apart from ParknShop, the company was reported to have made an indicative bid last year for the Coates machinery hire venture for which Carlyle Group LP and Seven Group Holdings Ltd. had hoped to fetch A$3 billion, according to the Australian Financial Review. Neither business was ultimately sold.

McLeod, 55, said he’s wary of expansion internationally even as he’ll be assessing overseas targets.

“There are far more retailers that have gone overseas and failed than have actually succeeded,” he said. Still, returning all excess cash to shareholders isn’t an option.

“If you generate a pool of income and it all goes to shareholders in dividends or extraordinary dividends, then where’s your ability to continue to invest in your business?” he said. “You shrink yourself to nothing.”

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