WOOLWORTHS OUTLINE ALH SALE

In Finance by Clyde Mooney

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Woolworths has finally announced strategy to divest its contentious Hotels division, to be coupled with its key liquor division, leaving the future of Australia’s biggest drinks-hospitality group dithering.

ASX-listed Woolworths (WOW) today released details of its plan to merge Endeavour Drinks and Australian Leisure & Hospitality Group (ALH) into a combined entity, Endeavour Group Limited (EGL).

The integrated drinks and hospitality business will turn over around $10bn, producing around $1bn EBITDA. Together they were responsible for over 30 per cent of WOW’s FY19 earnings.

The Mathieson Group, which currently owns 25 per cent of ALH, will own 14.6 per cent of the new EGL.

Following the merger, WOW will look to divest the majority of its 85.4 per cent by demerger through private sale or an IPO, while retaining a minority stake. This will include the 8.7 per cent stake in its major landlord, the listed ALE Group.

The separation is forecast to be completed in calendar year 2020, following the path of the failed Masters hardware division and more recently WOW’s petrol business. The shake-up is part of the company’s three-stage Horizon strategy, now entering phase two.  

This morning a conference call led by Goldman Sachs analysts advised potential investors.

Uncertainty around the divestment process will undoubtedly attract private equity parties, looking to capitalise on opportunities.

It was revealed that capex in the hotels and liquor divisions does not reconcile with earnings. Endeavour contributed 25 per cent EBITDA, yet saw only 15 per cent capex.

Funds applied to the pubs division are said to be well below typical reinvestment, with at least a third spent on maintaining gaming offerings across 286 gaming rooms.  

ALH untypically acquired only five hotels in the past year – although sources suggest the group has undertaken a quiet buying spree of as many as two-dozen pubs in recent months; this could add instant value to a portfolio headed toward sale at around 12 times EBITDA.

The Mathiesons’ reduced role, coming with just one seat on the board, is likely to see new board members shake up the gaming-centric portfolio, very likely leading to capital raising and significant portfolio hygiene in the first 12 months.

New management will almost certainly elect to divert capital into parts of the business that are underperforming because they have been under-invested. They will also benefit from the freedom to pursue better service agreements across the two divisions.

It is not yet known how the rent covenants on the leaseholds, underwritten by Woolworths independent of sale, will be structured into EGL.

Plagued with PR crises’ WOW managing director Brad Banducci has offered that the company is not seeking to offload its public image problem of poker machine ownership, suggesting instead that the problem has been rectified.

Despite these assurances, ILGA is yet to announce its verdict on a disciplinary hearing on two ALH pubs accused of systemic rule-breaking through practice of providing gaming patrons with free drinks.

Endeavour Group Limited will be comprised of:

Liquor

  • Dan Murphy’s – 227 stores
  • BWS – 767 attached stores (214 drive-thru, 70 metro, 287 stand-alone)
  • Online
  • Specialty (Langton’s, Cellarmasters, Jimmy Brings)
  • Pinnacle
  • Total rent across the sites: $430m annual

Hotels

327 ALH operated hotels, with

  • 286 operating gaming rooms, containing 12,000 EGMs
  • 295 operating restaurants or bistros
  • 100 hosting live ticketed events
  • 2,000 rooms across 96 locations
  • 391 dedicated function rooms
  • 33 freehold locations
  • Total rent across the sites: $220m annual