WESFARMERS’ WOES COULD BE AUS VENUE CO BOON

In Finance by Clyde Mooney

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The battle of the supermarket pub groups has taken another twist with Wesfarmers’ mooted plans to shed Coles from its portfolio, as Aus Venue Co looks to step up the value of its operations.

Eleven years after buying and reviving the national supermarket chain, Wesfarmers has announced plans to divest most or all of Coles, along with its 89 pubs and around 3,000 poker machines.

“We’re reluctant owners of that business, and it’s very rare that we would acknowledge that,” said Wesfarmers’ new chief executive Rob Scott of the pub businesses, which it inherited with the purchase of Coles.

After years of double-digit growth, Coles has suffered in the price war with Woolworths, in the face of increasing competition in the domestic market. Recent half-year results showed Bunnings overtook Coles for the first time as Wesfarmers’ biggest profit earner, after a 12 per cent gain (to $864m) by the former, and 14 per cent drop (to $790m) by the latter, which was actually ahead of analyst’s expectations.

Speculation on the future of Coles’ pub arm, Spirit Hotels, has centred on the conundrum the company faces, seeking to continue its profitable sale of takeaway liquor, but Queensland laws requiring bottleshops to be associated with a pub. For that reason, most of its pubs are in Queensland.

The company has long murmured discontent with its exposure to gaming machines, flagging potential $1 bet limits in its venues, but stopping short of attempting to run the pubs without EGMs, Scott telling Fairfax that “for pubs to be economically viable in that market, poker machines are a part of that offer”.

Instead, discussions are believed to have centred on divesting the pub operations in Queensland, leased to HPI, while retaining or sub-leasing the bottleshop entitlements in an as-yet unspecified arrangement.

Conversely, the former Dixon Group, now Australian Venue Company (AVC) and majority backed by private equity behemoth KKR, is said to be looking to rapidly grow its pub business with view to an IPO as soon as late 2018.

Reluctant pokies operator Coles is unlikely to have optimised earnings at its 89 venues, all outside of WA holding gaming machines, and the aspirational AVC – unlike its ancestral origins – has no qualms with running pokies as well as the food and bev.

And like many operators in Queensland, the retail liquor side of the business is an increasingly lost battle to the big-box outlets, operated by Woolworths and to a lesser extent Coles, and not necessarily hard to concede.

While the asset exchange may seem to address the goals of both entities, it remains to be seen if the tied bottleshop laws in Queensland can be navigated.

Also, HPI, which owns the vast majority of Coles’ 89 leasehold interests, may be reluctant to endorse mass sale out of the triple-net leases to the hyper-expansive AVC. After years of consistent growth since its launch late 2013, HPI has recently fallen up to 15 per cent from its high of $3.41 in January 2018.

But ultimately, should Wesfarmers continue with intentions to sell-off most or all of Coles, the new owners may not feel the pressure to rid themselves of the alluded tarnish of pubs with gaming.