09/07/2013 - 06:58

Divesting assets pays dividends

09/07/2013 - 06:58

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The success of the demerger process at two Australian businesses – News Corp and Brambles – has led to calls for more of them, with fingers again being pointed at Wesfarmers.

The success of the demerger process at two Australian businesses – News Corp and Brambles – has led to calls for more of them, with fingers again being pointed at Wesfarmers.

Many investment pundits perennially talk down Wesfarmers, which has generally performed well under a strategy that provides for head office to allocate capital to internal businesses.

In some ways this is no more than a listed investment vehicle, but Wesfarmers will claim its management expertise and discipline give it an edge that a true fund manager will never have.

Apart from the huge purchase of Coles, which, due largely to timing (and therefore the price paid), destroyed a lot a value for long-term shareholders, Wesfarmers has an enviable track record.

It has an astounding 39 per cent total shareholder return for the year ending June 30. That return drops to 17 per cent over three years and only 8 per cent over five, highlighting the absorption of Coles and effect of the GFC at the beginning of that period.

There is an argument that Wesfarmers really is just a retail business with a bunch of legacy assets such as insurance, chemicals and mining.

Then again, Wesfarmers has never been shy about divesting assets that no longer paid their way. Despite its roots as an agricultural cooperative, it flogged its rural merchandising assets when offered a good price – much to chagrin of many original shareholders from the farming community.

There is nothing to suggest to me any of those non-retail assets would be operating better as individual businesses. In fact it is possible to argue that expanding coal mines and explosive plants might be harder to fund as stand-alone businesses, and that Wesfarmers’ access to capital might give those operations the edge in these tight times.

More importantly, the successful demergers of News and Brambles reflect businesses (and investors) wanting to escape the shackles of sectors that were dragging them down.

News Corp was being drained by the retraction of its print newspapers, which had also become a political liability to its entertainment assets because of the UK phone hacking scandal.

Brambles had been trying to sell its Recall document storage business for some time.

Spinning off unwanted subsidiaries – which occurred in both these cases and is something that Wesfarmers has done consistently over the years – is different to breaking up a conglomerate because the sum of the whole is worth less than the parts.

 

 

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