Masters dumped by Woolworths
The dumping of Masters, Woolworths' household hardware chain, may make 10,000 employees jobless. We asked shoppers their opinion of the troubled chain.
PT1M41S 620 349Wesfarmer's credit rating and generous dividend are at risk from its $705 million acquisition of UK hardware outfit Homebase, according to Bank of America Merrill Lynch analyst David Errington, who has compared it to Woolworths' disastrous foray into the home improvement sector.
Mr Errington said the damage to investor returns and business performance at Wesfarmers from Homebase would "equal" the impact of Woolworths' costly Masters experiment.
Wesfarmers in January said it planned to spend more than $1 billion rolling out the Bunnings hardware brand in the United Kingdom and Ireland within five years after buying the second-largest home improvement chain in the UK market. Chief executive Richard Goyder said at the time the investment was a "deep step" into the overseas market that increased the company's risk profile, but one that had been made with "eyes wide open".
Wesfarmers boss Richard Goyder earlier this year said the Homebase acquisition had been made with "eyes wide open". Photo: Philip Gostelow
"We were critical towards Woolworths entering the Australian home improvement sector via Masters and we believe Wesfarmers entering the UK market via Homebase will be as equally a compromising decision for Wesfarmers," Mr Errington said on Tuesday.
"Paying $705 million for a business generating $40 million of earnings before interest and tax, and where that business is smaller scale in a tough industry, raises questions.
"And when a further $1 billion is being committed over the next five years to improve the business, we are highly sceptical."
Hardware insiders are concerned the turnaround of Homebase will be costly and require significant investment to build the network and market the Bunnings brand in the UK. Photo: Bloomberg
Hardware insiders are concerned the turnaround of Homebase will be costly and require significant investment to build the network and market the Bunnings brand in the UK, a market dominated by Kingfisher's hardware behemoth B&Q.
It is understood Wesfarmers is testing several different models before rolling out the Bunnings brand and UK hardware sources suggest it is already working on changes to the product mix.
Mr Errington said Homebase appeared to have the "distinct competitive disadvantage" of high base costs and low sales.
"Being the lowest cost while having the highest costs is basically unsustainable and irrational for any business," Mr Errington said.
Merrill Lynch said Wesfarmers' fixed-charge ratio - the key metric used by rating agencies - was falling as a result of weak performances from its Target chain, and coal and industrial units.
In concert with $600 million in annual rent charges from Homebase, Mr Errington said Wesfarmers' credit rating could slip by as much as two "notches" from A-negative to BBB, the same level as wounded rival Woolworths.
It is understood the ratings agencies have looked into the Homebase deal in some detail and sources close to Wesfarmers suggested the fixed-charge ratio was only one metric used to calculate ratings.
In January ,Standard & Poor's downgraded its risk-rating outlook for Wesfarmers from stable to negative, however, Moody's said Wesfarmers' rating was unaffected by its then proposed acquisition of Homebase.
Mr Errington said Wesfarmers had funded dividends in the past few years by selling and leasing back properties across its portfolio, supported by its balance sheet as well as its credit rating.
"However, with the drop in earnings now expected and post its Homebase acquisition, which brings with it more than $600 million worth of annual rent expenses, this strategy now looks to be closing and with a fixed-charge ratio forecast to fall to 2.44 times, its growth options look challenged," Mr Errington said.
Merrill Lynch forecast Wesfarmers' dividend per share would fall to between $1.80 and $1.85 over the next two years but warned that even this cut might not be enough to protect its balance sheet.
"Wesfarmers' balance sheet can no longer afford paying out 90 per cent of its earnings in dividends ... and it can not afford any of its businesses sustaining further drops in earnings."
Woolworths announced in January it would either sell or shut down its struggling hardware chain Masters, as it could no longer sustain the losses of more than $200 million it was incurring every year.
Wesfarmers is expected to provide an update on Homebase as well as its strategy for Target at a briefing in Sydney next week.
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