Deal puts Woodside in big league

The announcement last month that Woodside Petroleum would acquire the oil and gas division of resources giant BHP is big news in Western Australia.

The deal effectively doubles the size of Woodside, gives it greater control of its future in WA, and diversifies its asset base internationally in one simple move.

While the fickleness of commodity prices means Woodside will only be restoring its paper value somewhere close to its worth at the peak of the 2007-08 resources boom, it does shift the weight of corporate might slightly further west across the Nullarbor.

There are broader repercussions, too, as the deal will make Woodside a top 10 global player in the oil and gas industry, underscoring Perth’s unique position as a resources capital with the rare double of major energy and mining stocks based here.

The rise of Fortescue Metals Group, from an idea scribbled down in Andrew Forrest’s kitchen to mining giant, means Perth now has three of the nation’s top 15 listed corporations headquartered here.

The other big player is Wesfarmers, which, depending primarily on the price of iron ore, sits just above or just below Fortescue at around seventh or eighth biggest.

If Woodside’s $20 billion market capitalisation (at the time of writing) were to double, it would put the new oil giant just below the biggest 10 companies on the ASX. This is major news.

With the oil price improving, it would be a significant day when three WA companies sat in the national top 10.

Of course, it is just as likely iron ore could tail off and drag Fortescue out of that league.

Perhaps the biggest surprise to me is that Wesfarmers remains so strongly positioned.

In 2008, it sealed a major deal to buy Coles, effectively doubling the size of the business.

However, buying one of the nation’s two retail giants was seen somewhat as the tail wagging the dog.

That deal was certainly big.

Based on the market capitalisations of the companies at market close at the time the deal was announced in November 2007 – Wesfarmers $16.03 billion and Coles $18.3 billion – the combined entity was valued at $34.33 billion.

That merged value lifted Wesfarmers above Woodside, then valued at $32 billion, to become WA’s biggest company.

In 2021-dollar terms, that merger had a combined value of $46.76 billion, enough to push Woodside’s announcement in August 2021 into second place – at least in terms of deals this century – with the implied value for the new entity of $39 billion at the time of the announcement.

But it is not all about the headlines on the day. In my view, the Coles deal was costly in terms of what capital and management energy it took for Wesfarmers to improve the low-margin supermarket business.

That seemed obvious when the 2018 demerger took place.

Coles was valued at $17 billion, while Wesfarmers dropped from $52 billion to $35 billion without the supermarket business.

Wesfarmers now has a market capitalisation of around $70 billion, so it is clear to me that letting loose most of Coles – it retained 15 per cent – was a positive move for it and the supermarket, now valued at $23 billion.

It’s a long way down to the next biggest WA-based players.

Base metals group South32, itself a spin-off, from BHP (five years ago), sits just in the top 40; gold player Northern Star Resources nudges into the top 50; while Mineral Resources, is just out of that top echelon.

Pilbara Minerals is the only other WA company in the top 100, as I looked at it towards the end of August.

The concentration on mining is an understandable consequence of WA’s natural resources advantage.

That resources focus is exacerbated by the fact that some of the non-mining players that rose to prominence out of WA have been gobbled up or privatised.

Education player Navitas is one, and internet service provider iiNet another.

The acquisition of Bankwest by UK-based HBOS and then by Commonwealth Bank during the GFC has kept our financial services presence on the ASX to bit players, while CBA is the country’s biggest listed business, and its three main rivals all sit in the top 10.

Thus, we have a very top-heavy structure among the listed companies with three giants, a few mid-tier players, and a very long tail of smaller listed businesses.

Maybe we need a few more big deals to change that.