Skewered Officeworks sale raises wider Wesfarmers questions

Richard Goyder, Managing Director of Wesfarmers, photographed at their head office, 40 The Esplanade, Perth, WA; 24 August 2016, by Philip Gostelow afr Photo: Philip GostelowThe imminent arrival of Amazon has skewered Wesfarmers’ ability to do what it does best – horse trading assets.


The Perth-based company has an established record of buying low and selling after a well-engineered renovation.

The decision to pull the Officeworks float is more meaningful for Wesfarmers than just ditching the sale of this asset.

Investors have been applying pressure on Wesfarmers to refresh its line-up of businesses for a while.

And Officeworks looked to be the best candidate to be churned.

The trouble is that Wesfarmers seems to have left its run too late. Six months ago this deal would probably have been done easily and at a price that ticked all the boxes.

The window of opportunity now seems to have closed for any would-be seller of retail businesses.

Its coal assets are also on the market through a process kicked off late last year. And although there appeared to be a flurry of initial interest, the talk has gone quiet over the past few months around the sale of the coking coal assets in the Bowen Basin and the stake in the Hunter Valley thermal mine.

Coal assets aside, the majority of Wesfarmers’ businesses are now in retail which is challenged thanks to a pincer – one side being the spectre of Amazon and the other pretty horrific consumer conditions.

Officeworks was chosen by Wesfarmers as the prime candidate for sale because it was easiest to amputate from the rest of the portfolio and it’s an asset easy to market to shareholders – a good history of growth and a business that has been well run.

Wesfarmers is not totally conceding defeat. If a trade buyer emerges offering an attractive price then it’s game on. But given trade buyers – the most likely would have been private equity – had already been canvassed in parallel with the IPO, we can assume none came up with a compelling bid.

Ironically selling an asset that is already well run leaves little upside for the likes of private equity who would be looking to on-sell in maybe five years.

Over that time horizon, Amazon will have well established itself in the Australian market – the impact of which is something of a crap shoot.

If Amazon’s impact is ultimately not as devastating as some fear, then the opportunity to sell Officeworks or any other retail assets could emerge again. But this is years away.

When Officeworks started the process of investigating an IPO retail businesses were being valued at multiples of earnings of as much as 16 times but fears of pressure on profits has left would-be investors loath to pay generous prices for anything in that sector.

Officeworks has a fairly good growth profile based on Wesfarmers’ estimates. Sales for the third quarter against the previous corresponding quarter were a robust 9 per cent.

Analysts forecast Officeworks is on track to lift earnings by at least 6 per cent to $142 million this year and by 8 per cent to $153 million in 2018. Amazon rumble

But the market has also witnessed the havoc Amazon has caused the US office supply retailer, Staples.

The Amazon effect will at the same time curtail the ability of Wesfarmers to sell other assets in its retail portfolio. While there has been no mention of a desire to do so, investors have long been agitating for the West Australian conglomerate to deal with Target – although its performance makes a sale near impossible.

While Wesfarmers shares dipped in morning trade, it was certainly not catastrophic.

The same cannot be said for high-end fashion retail group, Oroton, whose very ugly profit downgrade sent its shares crashing more than 21 per cent in morning trade.

It admitted that sales fell 11 per cent in the first nine months of its financial year including April, with the decline accelerating from a 10 per cent slump in the first six months. iFrameResize({enablePublicMethods : true, heightCalculationMethod : “lowestElement”,resizedCallback : function(messageData){}, checkOrigin: false},”#pez_iframeA”);

Worse still, it seems it is looking at underlying earnings of just $2 million to $3 million for the full financial year, down more than 75 per cent from $12.9 million in 2016.

Oroton chief executive Ross Lane spoke of poor and competitive retail conditions – a view that has been mirrored by others in the industry.

Meanwhile data released on Wednesday by Westpac that shows consumer confidence has fallen since the federal budget was released.

Perhaps more importantly, ABS stats out on Wednesday showed real wages had gone backwards in the March quarter in real terms.

The lack of wages growth and little by way of any prospects for short-term improvement is the sleeper issue at the heart of problem for retailers.

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