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Woolworths Group takes big steps towards de-merger

Wed, Dec 18, 8:09am by Noah Taylor

Australian supermarket giant Woolworths is poised to take a significant step towards its plan to spin off its $10 billion a year Endeavour unit, which includes bottle shop retailer Dan Murphy’s and hundreds of pubs and pokies operators.

The Sydney Morning Herald reports that Woolworths shareholders voted last Monday on the first stage of the mammoth restructure and demerger, that will ultimately form a new listed entity know as Endeavour Group.

The complex three-stage plan was unveiled in July.

“It’s no doubt the biggest, most complex transaction in the company’s history,” Woolworths chief executive officer David Marr said.

“We’ve got 50 dedicated team members from right across the group working on the project itself.”

A plan 12 months in the making, its success 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, who make Tun, Bowler’s RUn and Mishka, a slew of venues, hotels, nightclubs and pokies operations around Australia, run by the ALH Group.

Woolworths will own 85.4 per cent of Endeavour, with the remaining 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.

This is a common manoeuvre by big companies, designed to unlock value for their shareholders.

Woolies following Coles’ lead

Woolies’ main rival Coles was spun out of conglomerate Wesfarmers last year.

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.”

The complexity of Woolworths stores are laid bare by examining any one of its sites.

At 550 locations 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 by maintaining and formalising their close working relationship will be the aim of the first stage of the process.

It will see the drinks business 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,” Marr said.

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.

Marr predicts this will be completed on or around February 4, 2020.

It does not require shareholder approval.

Endeavour’s fate to be sealed in 2020

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.

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

“If we were to receive credible itnerest 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 Preeze 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.


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