Bunnings Acquires Homebase Difficult Transformation, but Future Market Growth
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BUNNINGS HI ACQUIRES NEWS HOMEBASE Vol. 2 No. 1 KINGFISHER CAPITAL MARKETS DAY • WOOLWORTHS SHUTS MASTERS • RIGID STEALTH FORCE OIL-PULSE DRIVER • MASTERS EXITS DEVELOPMENTS • HOMEBASE WILL BENEFIT FROM RISING TREND IN RENOVATION STOCK 3 Kingfisher’s 5-year Changeup ...........................16 Woolworths Shuts Masters ...............................20 Rigid Stealth Force Oil-Pulse Driver .................23 Big Box Update .................................................26 Masters Exits Developments ............................29 16 Indie Store Update ............................................30 Wesfarmers Industrials .....................................31 News ..................................................................33 New Products ....................................................38 23 38 Wesfarmers/Bunnings Acquires Homebase Difficult transformation, but future market growth esfarmers has offered GBP340 million understand home improvement retailing in the UK, and (around $705 million) for the Homebase develop what it refers to as “a winning offer”. home improvement retail operations of the The predicted period for the complete transfor- WUK-based Home Retail Group. The offer is highly mation of Homebase to Bunnings UK is around three likely to be accepted by Home Retail Group’s share- years, and the company estimates it will require an holders, with the transfer taking place in early April investment of GBP500 million over and above the 2016. Homebase will be managed by the Bunnings GBP340 million purchase price. team at Wesfarmers. After an initial period of operat- ing Homebase as Homebase, there will be a rollout Acquisitions of a Bunnings-branded retailer in the UK, using the Mergers and acquisitions are always interesting retail real estate currently operated by Homebase. corporate events to report and analyse. One reason As part of these changes, Michael Schneider has for this is that while corporations will commonly offer been promoted to be in charge of the operations of all manner of statistics, assertions, descriptions and Bunnings in Australia, as managing director. Peter analyses supporting what they are doing, the reality (“PJ”) Davis has been promoted to be in charge of Bun- is they are seeking to merge or acquire because they nings operations in the UK and Ireland, also as manag- want/need to. ing director. John Gillam will oversee all of Bunnings’ What usually fuels that want/need is a combination operations, and his title is now Bunnings chief execu- of two drives: the need to better employ certain capa- tive officer (CEO). bilities the company has developed; and a need to fulfil Wesfarmers has indicated it hopes to retain many of the current Homebase retail staff. The current manag- ing director of Homebase, Echo Lu, who was appointed in April 2015, has agreed to remain with the company in the interim. Briefing In mid-January 2016 Wesfarmers held a preliminary briefing into the potential Homebase acquisition. The presentation was delivered by the Wesfarmers manag- ing director, Richard Goyder, and Mr Gillam. What was presented was very preliminary. Its purpose was clearly not to provide a clearcut vision of GBP340 million how Wesfarmers would go about managing this acqui- acquisition price sition, but more a broad overview. Its main content was a quite rough assessment of the home improvement market situation in the UK and Ireland, and an outline 265 of how Wesfarmers will set about improving the opera- stores tions of Homebase. This improvement will include running Homebase as Homebase for around a year, then rebranding and 3500 sqm repurposing its real estate assets into Bunnings brand- average store size ed, warehouse-style retail outlets. An important com- ponent of this transformation will be opening a number of Bunnings branded “pilot” stores, which will be used April 2016 as experimental platforms for the company to better acquisition completes hnn.bz 3 certain strategic objectives that cannot be met through Overview the organic expansion of the business. In much of what follows, HNN takes a detailed Wesfarmers’ current proposal to take-over the approach to analysing and exploring the issues raised Homebase home improvement big-box retail opera- by this presentation. As some of the statistics provided tions of the UK-based Home Retail Group seems to and the assertions made do not seem to accord with have these two sets of drivers. independent sources, some of this is slightly critical. Capability investment Additionally, HNN does go into some detail about the challenges that Wesfarmers will face in tackling this In its efforts to ensure that the Woolworths-owned acquisition and transformation. This includes issues big-box retailer Masters Home Improvement did not such as finding an alternative to an unsegmented succeed, Wesfarmers invested heavily in Bunnings. approach to the market (for reasons we detail), mov- While that investment continues to reap good returns, ing to develop capacities in online/digital retailing, and the question remains as to whether Bunnings will con- developing more sophisticated marketing. tinue to deliver the kind of growth expected of divisions HNN does move on to opportunities, and some of by conglomerates such as Wesfarmers. what seems the hidden logic driving this acquisition. The Homebase acquisition provides Wesfarmers We demonstrate statistically some features of the UK with a suitable “home” for the talents and capabilities housing/renovation market that we believe is actually that it has developed in its Bunnings operations. One evident to many of the other home improvement retail- way to look at it is that the company has found a good ers in the UK. In short, we believe there to be strong place to invest the “knowledge capital” it has available. statistical indications that renovations and DIY are likely Strategic gain to pick up quite strongly from about 2019 onwards. HNN believes that it is possible that major com- There is also the possibility of a strategic gain. petitors in the market, including Kingfisher and Travis Wesfarmers is in effect “exporting” knowledge about Perkins may have made a similar assessment. This home improvement retail to a new market, the UK. In would be one reason why they have embarked on return, as the UK has a more advanced general system programmes of significant business transformation. In of retail (particularly as regards online “omnichannel” part, they need to get through the next three to four retail), Wesfarmers will find information about new retail years with better earnings through improved efficien- practices filtering back into the company. cies. Also, however, they are setting themselves up to This knowledge can be used directly by the Austra- take maximum advantage of a coming sharp increase lian operations of Bunnings, and in further developing in activity. Wesfarmers’ other retail operations. If this statistical forecasting is accurate, this would There are other strategic benefits as well. The UK mean that Wesfarmers’ timing of the Homebase ac- market is not resource-dependent in the same way that quisition is very good. Had it taken place a year or two the Australian market is. In fact, it is to some extent ago, the company would have experienced a more pro- contra-cyclical to the Australian market. longed exposure to a down market. Had it taken place Perhaps one of the most important “macro” issues a year or two in the future, it is unlikely that Bunnings is simply that the Australian economy is likely to grow UK would have been developed sufficiently to take -im at quite a slow rate over the next six to eight years. mediate advantage of the increase in activity. Instead it Manufacturing is steadily decreasing in importance as, would have found itself competing in a market where its for example, car making plants for Ford and Holden competitors could work more effectively, and offer very shut down. Replacement economic activities, such strong competition for market share. as services and technological development, will take HNN has commented in the past that we believe around a decade to fill the gaps that lower commodity that Bunnings is partly in the business of surprise. This prices and less manufacturing will leave. acquisition also surprised us, but we believe this is a The UK market, by contrast, is much further along positive event. We do think that the next four years are in its economic transformation. It has, for example, a going to be a very difficult time for Bunnings UK, and thriving high-tech entrepreneurial sector. By moving that it is likely it will take Wesfarmers more time and some investment to that economy, Wesfarmers is likely also more funding than it has allocated to achieve the to see better returns than it would investing solely in result the company seeks. However, equally, we believe the Australian economy. the underlying, medium-term fundamentals of the UK home improvement market are so strong that this in- vestment will prove to be a good one. hnn.bz 4 Understanding the acquisition While the capability investment and strategic gains little baseless, and so do not provide a useful general goals may be the real purpose of this investment, Wes- indication about the market. farmers has presented its case for this acquisition in That is due to two factors. The first is that there is a the terms more usually used for a general investment. confusion in them between defining what is sometimes It has used a framework similar to one for a standard, called the “addressable” market, and the participatory more organic expansion. In taking this tack the compa- market. The second factor is that Wesfarmers seems ny has supplied some unusual interpretations, both of not to fully understand how the UK’s Office of National available data and the general concerns that surround Statistics (ONS) formulates its retail statistics, especial- the acquisition. ly how the actual numbers get reported. It is very likely that when Bunnings presents its Wesfarmers does not supply the statistical origin of Strategy Briefing in May 2016 much of what seems the GBP38 billion assigned to the size of the UK home inconsistent and a little unclear will be ironed out.