‘Day zero’ for Woolworths as it embarks on $10b pubs and pokies spinoff

Supermarket giant Woolworths is poised to take a significant step forward with plans to spin off its $10 billion-a-year Endeavour unit, which includes bottle shop retailer Dan Murphy’s and hundreds of pubs and pokie operators.

Woolworths shareholders on Monday will vote on the first stage of the mammoth restructure-cum-demerger that will ultimately form a new listed entity known as Endeavour Group.

The complex three-stage plan to spin off Endeavour was unveiled in July. “It’s no doubt the biggest, most complex transaction in the company’s history,” Woolworths chief operating officer David Marr tells The Sydney Morning Herald and The Age. “We’ve got 50 dedicated team members from right across the group working on the process itself”.

It’s no doubt the biggest, most complex transaction in the company’s history.

Woolworths’ chief operating officer David Marr

A plan 12 months in the making, a successful spin-off will see Endeavour become Australia’s largest drinks and hospitality business, with an estimated $10 billion in revenue and $1 billion in earnings.

In addition to Dan Murphy’s and BWS, Endeavour will own beverages supplier Pinnacle Drinks (maker of libations such as Tun, Bowler’s Run, and Mishka), and a slew of venues, hotels, nightclubs and pokies operators around Australia run by the ALH Group.

Woolworths will own 85.4 per cent of Endeavour, with the other 14.6 per cent in the hands of billionaire hotelier Bruce Mathieson due to his 25 per cent stake in ALH.

The ultimate goal for Woolworths is to list Endeavour separately on the ASX – a relatively common manoeuvre by big companies designed to unlock value for their shareholders. Woolies’ main rival Coles was spun out of conglomerate Wesfarmers last year.

But some shareholders such as Pengana Capital’s Anton du Preez argue there is a much simpler way for Woolworths to achieve that aim.  “I think if they can sell it at a very good price, that’s the preferred way to do it,” he says. “Because then you’ve got all the cash up front and you can do massive buybacks.”

Complexities laid bare

One look at a typical suburban Woolworths store and the complexities of the deal are laid bare.

At 550 sites across the country, the supermarkets are joined at the hip with BWS stores, sharing rental footprint, entrances, back docks and even staff. To add a further layer of difficulty, around 35 per cent of Dan Murphy’s and BWS stores are owned by ALH, and run under different administrative systems, such as payroll software.

Simplifying the structure of these businesses, while maintaining and formalising their close working relationship, forms the crux of the first stage of the process. It will see the drinks businesses and its 75 per cent ALH holding placed under the new Endeavour entity within the broader Woolworths Group.

“There are about 20 agreements [in place]…plus we’ve had to review property leases – of which there are 3000 – liquor licenses, all the material contracts, all the employee arrangements, and all the intellectual property” says Marr.

Following shareholder approval for stage one, Woolworths will then merge ALH into the new Endeavour entity, swapping Mathieson’s 25 per cent stake in ALH for a 14.6 per cent stake in Endeavour.

BWS stores are comprehensively integrated into Woolworths locations, a headache for the company's demerger team.
BWS stores are comprehensively integrated into Woolworths locations, a headache for the company’s demerger team.Credit:Peter Rae

Marrr predicts this will be completed on or around February 4 next year. It does not require shareholder approval.

Finally, Woolworths will then seek to spin out the freshly formed Endeavour Group in calendar 2020, either through an ASX demerger or another “value accretive alternative” – in other words a trade sale.

Separating its food business from its pokies business has been viewed as more of an incremental benefit, rather than a main focus.
Separating its food business from its pokies business has been viewed as more of an incremental benefit, rather than a main focus.Credit:Dion Georgopoulos

Marr won’t rule that out, but says the company’s preference remains a de-merger.

“If we were to receive credible interest from a trade buyer then naturally we would look at that, but our plan on record for the moment is a demerger because we’d have much greater control of the process,” he says.

Du Preez believes the split, in whatever form it ultimately takes, will allow each business to receive the capital and focus needed for growth.

“[Endeavour] has been playing second fiddle for some time, so now it can be on its own and get its own capital allocation,” he says.

It will also remove the ‘conglomerate discount’ from Woolworths main business, he says, allowing it to run as a pure food business – aside from its Big W department store chain.

On announcing the plan in July, investors and anti-gambling advocates congratulated the retailer for taking steps to divest itself from its pokies investments, although chief executive Brad Banducci played down the role community pressure had played in the decision.

Both du Preez and Marr take a similar approach, noting while the move away from pokies was well-supported by shareholders, it was a secondary benefit for the transaction and far from the key driver.

“At the end of the day, the economics are the most important part. But it will be a positive, there’s no doubt about it,” du Preez says.

Two candidates for leadership

Earlier this month, Woolworths appointed experienced ASX50 director and ex-Pizza Hut president Peter Hearl as the chairman-elect of Endeavour Group.

Analysts believe Endeavour will be neither ‘growth story nor cash cow’ and suggest the company may take it slow in terms of reinvestment.

So far, Woolworths hasn’t indicated who Hearl’s running mate and chief executive will be, but according to people close to the deal, it’s likely to either be current drinks managing director Steve Donohue, or Marr himself.

Marr wouldn’t comment on the current status of Endeavour’s potential leadership, saying only the process was under way.

Whoever the company picks to run its new division will have their work cut out for them, but it appears shareholders have tempered their expectations on Endeavour’s growth as a separate entity.

Credit Suisse analysts believe Endeavour will be neither “growth story nor cash cow” and suggest the company may take it slow in terms of reinvestment, with a prospective dividend payout ratio of 54 per cent.

But a successful demerger would leave Woolworths’ debt-free, the analysts believe.

Plenty of work ahead

Since announcing its intention to separate Endeavour, Woolworths’ share price has risen nearly 14 per cent to trade around $37.50, adding to a year of stellar growth for Australia’s largest retailer.

With all major proxy firms backing the spin-out, Marr is confident Monday’s annual general meeting and following restructure scheme meeting will see the crucial resolution passed comfortably.

But for him, the work will be just beginning.

“That’s what we call ‘day zero’,” he says. “While we’ve made great progress since July, there’s still a lot more to do.”

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