Bunnings misses
Bunnings UK & Ireland sold to Hilco
Bunnings misses the mark in the UK
Bunnings misses the mark in the UK
click for next slide
click for first slide
click for last slide
click for next slide
The opportunity might have been there, but poor oversight led to poor management, and a lost chance
HNN Sources
In what for many was a surprise, on 25 May 2018 the Australian conglomerate Wesfarmers announced the divestment of its Bunnings UK and Ireland (BUKI) division.

This does not affect the ongoing operations of its Bunnings Australia and New Zealand (BANZ) division, which will continue as is. In answer to an analyst's question about whether there would be changes to the senior executives managing BANZ, as Wesfarmers brings some personnel back to Australia, Wesfarmers' recently appointed managing director, Rob Scott replied that:
No we don't see any disruptions there... A number of the most senior team members will remain on with [Homebase], which I think is good for the business and good for the team. There may be a few team members that do relocate back to Australia, and we will work through that in the coming months, but no material impact to either business.

The divestment is expected to be completed by 30 June 2018. BUKI's operations will be taken over by Hilco Capital, a private equity firm with a record of UK retail turnarounds.

It has been reported that the transaction was based on the nominal payment of GBP1.00, but Wesfarmers has retained rights to receive 20% of any equity distribution subsequent to the further sale of Homebase. The agreement is not time-limited. Importantly, however, the agreement means that Hilco will be responsible for all lease entitlements, which relieves Wesfarmers of a substantial potential burden.

The announcement was accompanied by a presentation to analysts, which was attended by Mr Scott, and the company's chief financial officer, Anthony Gianotti. In his prepared remarks, Mr Scott stated that:
Homebase was acquired by Wesfarmers in 2016. The investment has been disappointing, with the problems arising from poor execution post-acquisition being compounded by a deterioration in the macro environment and retail sector in the UK. While it is important that we learn from this experience, this should not discourage our team from being bold and diligent in pursuing opportunities to create shareholder value.

In other remarks, Mr Scott repeatedly highlighted BUKI's dismissal of all of its executive staff, a move instigated by the division's managing director at the time, Peter Davis, as being one of the major mistakes Wesfarmers made.

The company announced that it expects the divestment to affect its FY2017/18 by between GBP200 million and GBP230 million, depending on elements such as pension contributions. Financial analysts estimate the overall loss from the BUKI venture may be in excess of $1.25 billion.
Analyst questions

Many of the questions that analysts asked were about how accountability for the loss of such a substantial sum would flow through to management and board members. Though not mentioned by name, much of that accountability would likely rest on the shoulders of the former managing director of Bunnings, John Gillam, and the former managing director of Wesfarmers, Richard Goyder.

They were the primary architects of the deal to acquire Homebase. Equally, though, Mr Gillam did not take a prominent role in Bunnings management during the period when Homebase was being transformed in the UK.

Mr Scott pointed out that decisions about how accountability would be enforced were up to board and management processes in Wesfarmers, and that it would not be appropriate for him to comment. However, he gave what assurances he could, including his personal view that the losses incurred should result in some form of consequence.

Perhaps the most interesting exchange took place between respected JP Morgan analyst Shaun Cousins and Mr Scott. Mr Cousins followed up a previous question by asking:
OK, but I mean, wouldn't due diligence actually highlight that you need to have local management in there. So was it a decision where the management effectively ignored some of the recommendations of the due diligence, or were these things not identified during the due diligence part?

Mr Scott responded:
Yeah, look I think, Shaun, part of it goes to implementation, and execution, management is critical both at an implementation level and also at a due diligence level.
I think there was an underestimation - this is just my personal view having reflected on the work - there was an underestimation of the competitive environment, and there was also an overly optimistic outlook in terms of the growth opportunity, and the capital investment that was required. They were some of the issues.
But as you would know, in every acquisition you make a lot of different assumptions. I feel like I've said a lot about the problems that went into this acquisition, and frankly what I am most focused on, is what can we learn from this, and what can we do better?
We've acknowledged that we needed to strengthen our capabilities. We have made material changes to strengthen our corporate capability. We have taken a very strong approach from the corporate centre around capital allocation, and we also recognise that when you move to offshore markets, you need to prioritise local management expertise.
Those are all the things that we are learning. To be frank, we need to learn from this experience, and look forward to what we can improve. I'm not sure what more I can say on what's happened in the past.

Unusually for Mr Cousins, he added a comment of his own to this, before moving on to the next question:
It is just concerning that you are looking to grow in an acquisitive manner, where the company's track record is not great, in that [when] you think about BUKI, the WorkWear business you bought from Pacific Brands doesn't appear to have been fantastic, you look at Australian Vinyls, Coles has been executed very well, but caused a lot of damage to group return on equity. It doesn't appear as though Wesfarmers has executed M&A really well over the last decade.

This is just the start of this article. To read the complete text, please download our HI News PDF magazine by clicking/tapping on the following link:
HI News Vol.4 No.4: Bunnings misses
HNN Sources

Bookmark permalink

Click to visit the HBT website for more information