WOOLWORTHS’ ALH SELL-OFF DILEMMA

In Finance by Clyde Mooney

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Speculation is rife Woolworths and the Mathieson family are poised to announce sell-off of the $3.6 billion ALH pubs portfolio.

Senior management of Woolworths Group and Bruce Mathieson Jr are believed to be back at the negotiating table, discussing plans to de-couple the ‘Fresh Food People’ from the hotels business, motivated by the unfavourable public perception felt by the supermarket giant over its operation of poker machines.

The publicly listed Woolworths (ASX: WOW) owns 75 per cent of ALH (Australian Leisure & Hospitality), with rich-lister Bruce Mathieson and family owning the other 25 per cent.

WOW is frequently the subject of public ire for being the country’s largest holder of EGMs, within its 330 pubs across all mainland states.

The company’s PR problem came to a head earlier this month when it was announced ILGA was hearing disciplinary complaints against two ALH venues for the ongoing practice of supplying gaming patrons with free alcohol, contrary to NSW laws.

Around 120 of the pubs in the portfolio are in Queensland – disproportionately large, due to the state’s requirement of bottleshops being linked to a pub. Each hotel licence can have up to four retail premises.

WOW’s drinks arm, Endeavour, counts over 500 retail liquor outlets, including brands Dan Murphy’s and BWS.

The company’s half-year report released in February cites EBIT for Endeavour of $290m, down 6.4 per cent, but still representing 14.1 per cent of WOW’s total earnings.

The hotels division saw $865m gross revenue and EBIT of $161m (18.6 per cent), down 1.5 per cent, contributing 7.8 per cent of Group earnings.

In February Woolworths Group CEO Brad Banducci offered poignant explanation for the hotels division’s flagging sales, as it was no longer giving away drinks.

“During the half we implemented a number of changes to the way we operate to improve responsible gaming practices including the removal of the complimentary service of alcohol (in addition to states where previously prohibited).”

WOW is clawing back Big W, reporting an $8m loss for the first half of FY19 (down 25 per cent), and companywide EBITDA is down $63m (2.4 per cent) on the corresponding period in FY18.

The figures have called many to question the wisdom of divesting the hotels business, given the comparative profitability of the hotels and liquor segments, but ALH’s latest scandal may have expedited the issue.

Rumours of the sell-off suggest the Mathiesons plan to retain their existing share, WOW will sell down to a minor share, and around two thirds of the pub group is headed to an IPO. Woolworths has engaged investment banks UBS and Citi, and Mathieson engaged JP Morgan. 

Beyond profitability issues for WOW, it remains to be seen how it could be written into such an arrangement that Endeavour retain control on the lucrative bottleshops tied to Queensland pubs.

Should Mathieson continue to exert control over the board, such an arrangement would likely only need to jump the Queensland regulator, success buoyed by Australian Venue Company’s deal with Coles to operate its 80-odd Sunshine State pubs, announced earlier this year.

Should an independent board be assigned to ensure shareholders’ best interests, ALH is likely to undertake significant portfolio hygiene, capitalising on a noted shortage of hotels to market in the eastern states, to shed under-performers and improve margins across the group.

Announcement of ALH’s future is tipped to take place this week.