Wesfarmers and United States joint venture partner Genesee & Wyoming today announced an agreement for the $1.3 billion sale of its Australian Railroad Group asset to Queensland Rail and Babcock & Brown.
Wesfarmers and United States joint venture partner Genesee & Wyoming today announced an agreement for the $1.3 billion sale of its Australian Railroad Group asset to Queensland Rail and Babcock & Brown.
The deal will see QR purchase ARG's above rail assets including rollingstock, terminals, yards, depots and customer contracts in Western Australia, New South Wales and parts of South Australia.
Babcock & Brown will takeover ARG's below rail business in Western Australia, accounting for the track and associated infrastructure.
"We very rarely put businesses up for sale but when someone comes along and says we are prepared to pay a price which is of interest to us," Wesfarmers chief Richard Goyder said today.
The announcement of the sale, from which Wesfarmers stand to collect $425 million, comes on the same day it announced a stellar half yearly profit for the period ended December 31 2005 of $447.5 million.
The result was an increase of nearly $120 million, or 36 per cent, on the same period for the previous year, and is accompanied by a rise in operating revenue of 10 per cent, to $4.4 million.
Westrail's freight network was privatised in 2000 through its sale to ARG for $585 million by the previous Coalition Government.
The ARG sale covers freight operations in WA and contracted services operating in New South Wales and Victoria, and also includes the remaining 43 year lease on the rail network in Western Australia.
ARG's South Australian freight services business, representing about 15 per cent of the existing business, will be separated from ARG as part of the transaction and Wesfarmers will transfer its interest in the South Australian business to G&W for $20 million.
The South Australian network was originally acquired by G&W in 1997 and combined with the Western Australian assets three years later to form ARG.
Provision has been made in the sale arrangements for QR to use the infrastructure in South Australia which will allow QR to operate as a national freight player.
QR Chief Executive Officer Bob Scheuber said the acquisition was a major step forward in implementing QR's national freight strategy.
"If we are to survive and prosper in this new competitive environment, we must look beyond our traditional state borders and take advantage of the many opportunities that competition provides," he said.
Wesfarmers' will record a pre-tax profit of approximately $235 million on the completion of the sale which is expected to occur prior to the end of the 2006 financial year, subject to regulatory approvals, including the ACCC.
Wesfarmer managing director Richard Goyder, said the sale would create a second major national rail player to the benefit of ARG's employees, customers and consumers across Australia.
"More than $360 million has been spent in new capital expenditure and another $395 million on maintenance," Mr Goyder said.
"By bringing the Western Australian and South Australian networks under the joint venture's management and winning new contracts in WA, New South Wales and Victoria, we have added significant value to the original assets."
Commenting on the sale of the state's rail freight network Planning and Infrastructure Minister Alannah MacTiernan said she could see some positives in the deal, but also flagged some reservations.
"We want a strong and competitive freight rail system for the benefit of WA business and certainly Queensland Rail has a good reputation," Ms MacTiernan said.
"There are also benefits in splitting track operations from the freight business, as this gives other rail freight operators more opportunity to compete."
But the Minister also said that the government would want to satisfy itself that the sale was in the best interests of the State and this included seeking legal advice as to what say the WA Government had over the sale.
"We will investigate whether the legal documents drawn up under the Coalition Government to sell Westrail have potentially left Wesfarmers and their American partners free to on-sell the shares in ARG without any requirement to get the State Government's approval."
Regarding its half year results, Wesfarmers Ltd said it expected annual revenue and profit for 2005-06 will significantly exceed the previous financial year.
In a strong first half result, Wesfarmers said the $447.48 million for the six months ending December 31 had been boosted by its energy division, namely coal driven by higher export prices and increased production volumes.
The company reported operating revenue of $4.4 billion for the half year, up 10 per cent.
"The directors continue to expect that group revenue and profit for the full 2005-06 year will significantly exceed the results achieved last year," Wesfarmers said in a statement. The company declared a fully franked interim dividend of 65 cents per share, up from 53 cents per share.
Wesfarmers also said its hardware business, dominated by Bunnings hardware operation, was trading well.
Retail sales growth and a modest improvement in trade performance was forecast for Bunnings, which has been under market scrutiny as the former growth powerhouse of the business.
Operating revenue for Bunnings increased by 3.8 per cent to $2.22 billion in the first half. Earnings before interest and tax (EBIT) of $220.9 million was 2 per cent below that of the corresponding period last year.
Bunnings expects to open up to nine new warehouse-style outlets in the second half of this financial year.
"Although headlined earnings were marginally under the same period last year, when you adjust for the cost of the employee share plan for this year and its investment in store upgrades then underlying earnings were up six percent," Mr Goyder said.
"Second quarter sales performance was pretty strong. Store-on-store growth for the second quarter was 4 per cent.
"At the November briefing day it was about 1.1 per cent in the first quarter so a good lift in sales at Bunnings for the second quarter."
Wesfarmers' energy division reported a 57.3 per cent jump in operating revenue to $814.4 million. EBIT was up 177 per cent to $343.2 million.
Export coal would continue to benefit from high metallurgical coal prices and further growth in volumes were planned, the company said.
It has already settled prices for over a third of coal from its Curragh mine, where a 22 kilometre conveyor is expected to be completed later this year to smooth transport.
Mr Goyder said that: "although we won't get the previously stated target of 7 million tonnes of export coal this year, we are reasonably confident of getting 6.4 to 6.8 range and that we will be operating around the 7mtpa export production from next financial year".
"They are the things we can control.
"What we can't control is export prices."
On the capital expenditure front, Mr Goyder said: "Our balance sheet is in good shape, gearing in our net debt to equity has increased a bit but still in our target range, our cash interest cover of 13 times is obviously very strong."
"The CAPEX in the first half was around $300 million, slightly less than we anticipated due to some delays in some projects and expect full year CAPEX to be some closer to $775 million dollars but still very strong capital investment program going on throughout the group."