Wesfarmers execs facing bonus cut over UK divestment

bunnings-uki-st-albansWesfarmers’ executive team and board are facing a cut to their bonuses in the wake of a disastrous investment into expanding Bunnings into the UK & Ireland (BUKI).

The retail conglomerate announced on Friday that it would cut its losses and divest from the struggling Homebase network that it acquired for £340 million (around AUD$700m) in 2016.

Hilco Capital, an investment firm that specialises in distressed businesses, will buy the network for a nominal sum – including its brand, store network, freehold property, leases and inventory.

Wesfarmers said it will record a loss of between £200 million – £230 million (AUD$350m – AUD$406m) in the deal but will be eligible for 20 per cent of any equity that arises if Hilco sells the business down the track.

It believes this will allow it to participate in a possible profitable divestment of the business in the longer term.

Wesfarmers managing director Rob Scott told analysts on Friday afternoon that Homebase had been a “disappointing” investment and that he expects the remuneration of key executives and the board to be impacted.

“I expect that there will be clear implications,” Scott said. “They will be made very clear and transparent when we report our full year results and our remuneration report.”

Wesfarmers will offload more than £1 billion in lease obligations under the deal, which were cited to be a major barrier to exiting the market in February.

The 24 Bunnings pilot stores that Wesfarmers has spent the last 15 months converting from Homebase in the UK will be reverted back after the transaction is completed.

Scott was due to report the findings of a review into the loss-making investment at a strategy day on 7 June, but after weeks of rumours that Wesfarmers was actively pursuing a sale the conglomerate opted to break the news to the market early.

On Friday, after saying “all options were on the table” for the business in February, Scott said divestment was the best outcome for shareholders.

“While the review confirmed the business is capable of returning to profitability over time, further capital investment is necessary to support the turnaround,” Scott said.

“The materiality of the opportunity and risks associated with turnaround are not considered to justify the additional capital and management attention required from Bunnings and Wesfarmers.”

When Wesfarmers acquired Homebase in 2016 it had hoped to convert the network into a fleet of Bunnings stores but after what Scott has admitted were several post-acquisition blunders, the operation racked up significant losses.

Wesfarmers booked a $795 million impairment on BUKI in February and posted $165 million in losses from the business in the first-half of fiscal 18.

Further operational losses are expected before the transaction completes.

Damian McGloughlin, who was brought in by Wesfarmers to steer a turnaround of BUKI following the departure of Peter ‘PJ’ Davis in February, will stay on at Homebase.

Scott expressed confidence in the BUKI team in a call with analysts on Friday afternoon, talking up the potential upside of a sale of the business by Hilco if it can be turned around.

Hilco is the owner of Moores Furniture Group and Chapelle Jewellery in the UK and has a long history of buying, improving and selling off distressed assets globally.

Concerns over Wesfarmers’ M&A capabilities

Scott told analysts that Wesfarmers had been upfront with shareholders about the under performance of the BUKI venture, which was undertaken on the watch of his predecessor Richard Goyder, and that it was important lessons were learned from the experience.

“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,” Scott said.

The market has been critical of BUKI for months, with comparisons to rival Woolworths’ ill-fated Masters Home Improvement venture dogging the Perth-based conglomerate.

Analysts expressed concern on Friday about Wesfarmers’ mergers & acquisition track record, and how much confidence the market could have in future M&A decisions.

Merrill Lynch analyst David Errington congratulated Scott on stemming the bleeding, but said the BUKI venture remained a “dent to confidence” in Wesfarmers’ ability to pull off acquisitions.

Wesfarmers is currently in the market for opportunities after announcing plans to spin-off its supermarket business Coles earlier this year.

Scott said Wesfarmers’ biggest learning from the BUKI venture was the importance of having a “local team with local knowledge” on the ground, admitting that there were issues with both due diligence and execution.

“There was an underestimation of the competitive environment and there was also arguably an overly optimistic outlook in terms of the growth opportunity and the capital investment that was required,” Scott told analysts.

“We’ve acknowledged that we needed to strengthen our capabilities … we’re taking 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.”

But he said Wesfarmers was wary of making its business development team gun shy in the face of future opportunities.

“Whilst there has to be accountability I don’t want people to feel nervous and afraid to pursue new opportunities and take risks,” he said.

Updated – 1:20 AEST

More to come.

Comments

1 comment

  1. Philip Endersbee posted on May 28, 2018

    I cannot believe that one can say "Important lessons were learnt from the experience" and "executives are facing a bonus cut" in the same breath !!! Shareholders do not need to be fed this nonsense. Suffice to say Wesfarmers should line up all the executives who were found wanting here and not pay them a bonus at all for this year. This is the best lesson they can give and yes they will certainly learn from that.

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