Tiny creatures can be deadly. On Thursday Wesfarmers said it had bid for UK retailer Homebase. The Australian conglomerate, with a market value of A$44bn (US$31bn), has offered A$700m for the do-it-yourself unit of UK-listed Home Retail, which just rebuffed a bid from J Sainsbury. The deal would be Wesfarmers’ first outside Australia and New Zealand. It is a frightening offer despite the small size, and not just because of Home Retail’s profit warning the same day.
Wesfarmers owns Bunnings, Australia’s leading home improvement retailer by market share. Bunnings has operating margins about 10 times those of Homebase. If Homebase gets to Bunnings’ main level, last year’s A$53m operating profit leaps to more than A$500m. And that is just based on its current operations. Bunnings has a wider product offering, too, encompassing home goods as well as DIY, and sells more to the building trade. Add to this the simple fact that the UK is a larger market than Australia, and one can understand why Wesfarmers may be making big plans.
There are reasons to be sceptical of such ambitions. Start with Australian companies’ poor record with overseas forays. One thinks of (among other deals) the wobbly listing of South 32, a reversal of BHP’s 2001 Billiton acquisition; of National Australia Bank, which will spin off UK bank Clydesdale this year; and of insurer AMP’s purchase and subsequent demerger of UK fund manager Henderson. Anecdotes only go so far, but Australia is far away and success there appears hard to replicate abroad.
The fat margins of Australian retailers generally — like most sustained margin differentials within an industry — are likely to be products of local market competitiveness, or lack thereof. This will prove hard to export.
Sainsbury’s is more interested in Home Retail’s Argos division than in Homebase (which it once owned). The UK grocer will be happy to see the bid. Not so Wesfarmers’ investors.
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