No, no, no no more takeovers for Wesfarmers. The very clear message at yesterday’s investor day briefing from CEO, Rob Scott couldn’t have been any clearer.
So those investment banks and others starting to tout deals as the company prepares to spin off its huge Coles supermarkets business to shareholders, can think again and go away.
That’s especially banks like Citi which claimed in research this week that Wesfarmers could do a deal valued up to $12 billion.
After wasting more than $4 billion in impairments and losses – and over $1.2 billion of that in the Bunnings misadventure called Homebase in the UK – not to mention multi million dollar impairments of its now sold Curragh coal mine in Queensland and the Target department store chain, there is clearly no appetite for a big deal in the Wesfarmers boardroom.
At just over $45 each, Wesfarmers shares are trading around they were when the company bought the Coles Supermarkets, Target, Kmart, Officeworks and associated operations 11 years ago. It has been a decade of mostly going backwards and value destruction.
But yesterday’s news saw the shares get a new lease of life and they jumped 1.7% to $46.48 which looks like a new all time high close.
Helping that surge was the way CEO Scott went out of his way to dampen expectations of another big deal.
“When it comes to allocating big licks of capital, particularly new businesses, new acquisitions, what I am reinforcing it that it’s not the main game, it’s the icing on the cake,” Mr Scott said.
“We will explore it if we feel it delivers superior returns to our shareholders. If not, we will return the capital” to Wesfarmers shareholders, he said.
“The most compelling opportunities that I see to generate surprise returns from capital allocation reside in our existing businesses,” he said told the investor day.
“These are not mature businesses, these are businesses that have a lot of runway ahead.” That means Wesfarmers will be more inclined to invest capital in Wesfarmers’ existing businesses, which include Bunnings, Officeworks, Kmart and an industrials arm.
Target looks like it is till on the basket case list and it wouldn’t surprise if Mr Scott turns his attention to that underperformer in the next few months, once the June 20 results and accounts are out of the way.
The sale of Wesfarmers’ Bunnings United Kingdom and Ireland business in late May of a symbolic one pound, including the Homebase chain it bought in 2016, drew a “ line in the sand on a problematic investment”, Mr Scott said, and was “a clear indication of the disciplined approach we’ll be taken to future capital allocation.”
“It will also allow us to deploy our capital and management time towards areas that will deliver more meaningful returns to our shareholders,” he said.
Other news from the investor day yesterday is that Target is going to “shrink its footprint” by 20% and that Kmart is thinking of testing moves into offshore markets (not good news if you are a Wesfarmers shareholder with an aversion of offshore retail moves after the Homebase debacle).
Wesfarmers department stores chief executive Guy Russo (who turned Kmart into the most successful retailer in the country today) said the reduction would occur over the next five years.
He said staff at closing Target stores could be moved to one of Wesfarmers’ other brands, such as Kmart or Officeworks, but acknowledged this was not always possible in regional towns.
“Where it’s a little sadder is when it’s in the country town and there is no other retailer,” he told investors in Sydney. Mr Russo only named one store that will be affected at the moment and that was at the Highpoint mall in Melbourne which will be ‘downsized’.
In contrast to the Target contraction, Wesfarmers plans to open between eight and 10 new Kmart stores in Australia and New Zealand annually, and look offshore.
Kmart managing director Ian Bailey said the brand was keen to sell in overseas markets, adding that a small-scale test and learn approach was the way forward.
“We do all this work to design and make products for Australia and New Zealand and then we pitch them against the world class retailers who are offering their products all over the world,” he said.
Mr Bailey said countries such as Thailand and Indonesia were countries seeing a huge expansion in the middle class seeking more aspirational products.