Up to $2 billion in shareholder returns up for grabs with Woolies liquor spin-off in sight

Up to $2 billion in shareholder returns up for grabs with Woolies liquor spin-off in sight

Photo from Dan Murphy's via Facebook.

Woolworths Group's (ASX: WOW) drinks and hotels business Endeavour Group could be breaking away as soon as July after an independent expert recommended a demerger was in the interests of shareholders, who may be receiving $1.6-2 billion if the deal is approved at an 18 June general meeting.

The demerger doesn't exactly require a sweetener though as the deal involves giving shareholders the same stake they already own in Endeavour, which owns bottle shop chains Dan Murphy's, BWS, 332 licensed venues, more than 12,000 pokie machines and Pinnacle Drinks, among other ventures.

It has been a long time between drinks for the strategic initiative which started in 2019, as in March last year the separation was postponed until 2021 due to the disruption of COVID-19.

The pandemic led to long closure periods for Endeavour's pub network - a segment that accounted for 12 per cent of revenue in FY20 but 23 per cent of earnings. 

Last financial year Endeavour Group accounted for around a sixth of WOW's revenue and a fifth of its earnings.

If the deal goes ahead, WOW shareholders will own 70.8 per cent of a newly listed Endeavour Group, retaining their exposure to Australia's leading retail drinks and hospitality business with $10.6 billion in pro forma FY20 sales revenue and pro forma EBIT of $693 million.

They will also hold 14.6 per cent indirectly via an ongoing shareholding for Woolworths Group post-demerger, with the remaining 14.6 per cent held by the Bruce Mathieson Group (BMG) which entered into a joint venture with Woolies in 2001, culminating in the formation of now Endeavour subsidiary ALH Group in 2005.

In an independent expert report released to the public today, Grant Samuel highlighted expansion opportunities for ALH had been missed in the past due to competitive priorities in the retail space for the broader Woolworths Group.

"Recognising its potential, BMG has been keen to accelerate ALH Group's hotels business (now the Hotels division of Endeavour Group) growth in the fragmented hotels sector," Samuel said.

"However, this desire has, at times, differed from the interests of Woolworths Group."

He said Woolworths had needed to prioritise its investment in food businesses, particularly in 2016 and 2017 to protect its market share from growing competition from domestic and international competitors.

In addition, the group has required investments or acquisitions by the hotels business to align with the group's broader retail strategy, leading to a "lack of appetite" for purchasing hotels without a retail component and "several hotel opportunities being deferred or forgone".

With an identified need to split up the two businesses, Samuel said the demerger was more attractive than a trade sale or initial public offering (IPO).

"A trade sale would be challenging to execute, particularly given the size of Endeavour Group (broker valuations have been in the range $9.3-12.5 billion)," he said.

"There are no obvious trade or strategic acquirers of Endeavour Group (as opposed to financial buyers).

"A trade sale process would be protracted and disruptive and would have no certainty of success, particularly in current market conditions. Importantly, the process and outcome would not be within Woolworths Group's control and an unsuccessful process could have a material adverse impact on Endeavour Group's business."

He said the large size of Endeavour would also make a 100 per cent IPO "highly unlikely to be achievable".

Post-demerger, the independent expert is optimistic for Endeavour's new opportunities.

"Endeavour Group will have greater ability to take advantage of significant growth opportunities in the retail drinks and hotel hospitality sectors (including new store roll-outs to expand its national footprint, vertical integration in Retail, consolidation of the highly fragmented hotels market and development opportunities across the existing Hotels portfolio)," he said.

"Across its available facilities and its substantial portfolio of freehold properties, Endeavour Group has access to liquidity to fund these growth opportunities. It will also be able to pursue strategic opportunities by offering its own scrip (which is likely to be more attractive to vendors or merger partners than Woolworths Group scrip)."

In a letter to shareholders, Woolworths Group chairman Gordon Cairns noted the company would remain Australia and New Zealand's leading food and everyday needs business, and is expected to remain one of the 20 largest ASX-listed companies.

"As a separately listed entity, Endeavour will be able to pursue its business strategy with flexibility to invest and respond to changing consumer behaviours and industry conditions," he said.

He said both leading ASX-listed companies would have strong future prospects and benefit from the greater simplicity, focus and ongoing partnership.

Post demerger, Woolworths Group would retain its strong balance sheet with pro forma net cash (excluding lease liabilities) of $75 million as at 3 January 2021.

"We are excited to focus on our retail ecosystem with our customers and everyday needs at the core, while at the same time partnering with Endeavour Group," Woolworths Group CEO Brad Banducci said.

"We are committed to creating better experiences together for a better tomorrow for all our stakeholders."

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