Reuters
Reuters

MELBOURNE (Reuters Breakingviews) – It would be understandable for a company with agricultural roots to simply follow the herd. Instead, the AU$60 billion ($43 billion) Wesfarmers, whose origins date back more than a century to an agricultural cooperative, dares to defy the global trend of disruption shrouding many of its conglomerates. The numbers are on its side at the moment, but the Aussie company is just one bad business away from getting caught up in the backlash.

Wesfarmers is a classic collection of misfits. She sells hammers to homeowners, t-shirts to teenagers, and markers to middle managers. It also mines lithium, produces liquefied natural gas and manufactures sodium cyanide for gold mining. There are also stakes in an investment bank and a supermarket loyalty program. Unlike typical jack-of-many deals, however, it offers solid returns to shareholders and suffers no obvious hodgepodge discounts, based on Breakingviews’ calculations.

Such business models are again under fire from critics. General Electric, Johnson & Johnson and Toshiba are among those dismantling their empires. Unilever, Shell and 7-Eleven owner Seven & I are all under pressure from shareholders to do the same, as trustbusters increasingly challenge Meta Platforms and other US tech giants for their dominance over several foreheads. Even smaller, more tightly-structured companies such as Kohl’s and De La Rue face pushy investors pushing them to spin off.

This latest market mutiny has yet to find its way into the sealed-off mining state of Western Australia, where Wesfarmers began life almost 108 years ago as Westralian Farmers Ltd to help rural producers to sell their products collectively. After a brief wave of purges a few years ago, the Perth-based giant is adding to its sprawl again by acquiring pharmacies and possibly a veterinary service.

GENETIC ENGINEERING

Diversification is in the DNA of Wesfarmers. A decade after its founding, it established the region’s first commercial radio station to broadcast crop prices. It moved into the distribution of liquefied petroleum gas after striking an agreement with BP in the 1950s.

Its AUD$60 million bid in 1977 for a fertilizer maker three times its size was “the biggest takeover Australia has ever seen”, according to a pot story https://www.wesfarmers. com.au/who-we-are/our -history on the company website. Wesfarmers set another national M&A record 30 years later when it agreed to buy the Coles grocery chain for some A$21 billion, a purchase that included the Officeworks office supplies network and the domestic operations of Kmart and Target.

Owning an assortment of assets works to plan for Managing Director Rob Scott. Wesfarmers issued a stark warning https://www.wesfarmers.com.au/docs/default-source/asx-announcements/2022-half-year-results-update.pdf?sfvrsn=7bf716bb_0 last month about how Pandemic-related disruptions were hurting both discount retailers and online marketplace Catch due to store closures, rising transportation costs and warehouse staffing issues. Meanwhile, hardware chain Bunnings and the chemicals division have made enough progress to keep the overall profit target on track with consensus estimates.

“We don’t think about diversification to diversify investment decisions,” Scott told investors during a strategy briefing in June when asked about capital allocation. “We focus more on absolute returns. We believe we have a phenomenal mix of businesses that represent both a fairly unique balance of defensiveness, strong cash generation, but also good growth prospects.

The financial performance, despite a lack of obvious synergies, helps insulate Wesfarmers from the wider breakdown brays. Over the past decade, it has generated an average annual total shareholder return of around 22%, more than double the Australian benchmark. It also outperformed GE, J&J, Toshiba, Unilever, Shell, Seven&i, Kohl’s and De La Rue during this period.

POWER TOOLS

Bunnings accounted for nearly 70% of Wesfarmers’ pre-tax profit in the last full fiscal year to June 30, excluding impairments, restructuring costs and other material items, with a healthy operating profit margin of nearly 14% and growth in turnover of 12.5%. boot. The well-run home improvement brand resonates particularly well in a country obsessed with housing.

Partly for this reason, fund managers seem to simply view Westfarmers as Bunnings. The entire company is trading at around 18 times expected operating profit, about the same as Home Depot’s valuation, according to Refinitiv data, although most of the remaining divisions do not justify this. premium type.

After applying lower EBIT multiples to Kmart and other units, using division forecasts from Macquarie analysts and global peers chosen by Breakingviews, the top five Wesfarmers groups would be worth some A$54 billion. Add public market holdings and private equity estimates of Jefferies while rolling back net debt excluding lease obligations and business costs, and the coins add up to the same $60 billion. Australians than the present value of equity.

However, the framework is precarious and can be undermined even by small acquisitions. In 2016 Wesfarmers attempted to export its Bunnings know-how by paying £340 million for its British counterpart Homebase. Despite careful preparations, the deal turned out to be a management distraction and a financial waste. A reshuffling of the portfolio ensues.

After scrapping an early public offering plan for Officeworks in 2017, Wesfarmers handed over Homebase to turnaround specialists, divested capital-intensive Coles supermarkets and sold stakes in a thermal coal mine and carbon producer. oil and gas Quadrant Energy. Before long, however, Scott was using his newly healthy balance sheet to go shopping again.

The latest addition is expected to be Australian Pharmaceutical Industries, which will put Wesfarmers in the health and beauty industry after winning a heated bidding war last month for the A$750m operator of the Priceline Pharmacy chain. and others. He is also sniffing around the sale of pet and healthcare retail business Greencross, according to Australian Financial Review.

If Scott sticks to a bite-sized expansion at home, rather than mega-deals and overseas mishaps, he could continue to successfully stave off the cut-out crowds. There is also likely an increase in valuation available by divesting from some of the slower growing, lower margin companies. Even then, Wesfarmers could liquidate one of the last conglomerates standing.

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(Editing by Antony Currie and Katrina Hamlin)

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