Wesfarmers Offers $489 Million to Buy U.K. Chain Homebaseby and
Australian company plans to build Bunnings-branded business
Home Retail plans to return 200 million pounds to shareholders
Wesfarmers Ltd. offered to buy Homebase in the U.K. for 340 million pounds ($489 million) as the Australian conglomerate attempts to secure an overseas foothold for its home-improvements business.
The cash purchase from Home Retail Group Plc would give Wesfarmers 265 home-improvement stores, the second-largest in the U.K., and be the first step in a multi-year plan to roll out the Perth, Australia-based retailer’s Bunnings-branded business. Wesfarmers has carried out some due diligence and the process is being finalized, it said in a filing Thursday.
Wesfarmers is picking Bunnings, the industry leader in Australia and New Zealand, as the vehicle for the group’s first major expansion offshore. While profit margins at Bunnings dwarf those of Homebase, creating space for improvement, the company is following peers including Kathmandu Holdings Ltd. and National Australia Bank Ltd. that have struggled away from home.
“Any time an Aussie company ventures overseas, it’s fraught with risk,” said Daniel Mueller, an analyst at Morningstar Inc. in Sydney. “But if they can get a little bit of operating efficiency, there’s certainly scope for a lot of upside.”
Shares of Wesfarmers, which also owns the Australian supermarket chain Coles, fell 1.4 percent to A$39.40 in Sydney, giving the company a market value of A$44 billion.
The Homebase deal has a multiple of more than 20 times of EBIT, compared with a median of 11 times from acquisitions of 10 U.K. retailers announced in the last 12 months, according to data complied by Bloomberg.
Wesfarmers said the Homebase stores are the right size for a low-cost operating model. Bunnings has 338 stores and its annual revenue of A$9.5 billion ($6.6 billion) is about triple that of Homebase.
Homebase on Thursday reported a 5 percent gain in like-for-like sales in the quarter ended Jan. 2, fueled by kitchen and bathroom products, compared with the 5.4 percent increase estimated by analysts. The chain generated operating profit of just 26.3 million pounds in the year ended Aug. 29, 2015, while Bunnings made A$1.1 billion of operating profit in its latest fiscal year, according to Wesfarmers.
“Homebase delivers an established and scalable platform,” Wesfarmers said in the statement. “The U.K. home-improvement and garden market is an attractive and growing market.”
In a statement Wednesday, Home Retail said Wesfarmers had completed a detailed review of Homebase and the companies are closing in on a transaction.
Homebase has struggled as online shopping siphons demand from physical stores. The home-improvement chain has grown annual revenue just once over the last five years and is in the midst of a plan to close about 80 outlets to help cut costs.
“This deal would represent good value for shareholders," Home Retail Chief Executive Officer John Walden said in the release.
Should a deal for Homebase be reached, Home Retail plans to return about 200 million pounds to shareholders and contribute 50 million pounds to its pension scheme. The company would retain about 15 million pounds of the proceeds after incurring restructuring costs related to the deal.
Home Retail is scheduled to report details of its Christmas trading on Thursday and will hold a call for investors at 8:30 a.m. London time.