And, unless Briefcase is badly mistaken, we are watching yet another chameleon-like colour change by which Wesfarmers, through its joint venture bid for the Coles retail group, may become a very rare beast indeed – the public-listed private equity company.
Boiling several decades of Wesfarmers history, ancient and modern, into a simple, understandable structure, inevitably leads back to Argenti, who preached a simple business lesson – that the only reason for being in business is to maximise returns to the owners.
Understand this and you will understand why Wesfarmers has opted to become part of the private equity revolution, rather than be acquired by it.
Private equity, love it or hate it, is all about the use of debt and the ruthless application of hard-nosed business principles to achieve maximum shareholder returns.
It is, in effect, nothing more than a modern version of what Argenti first wrote about 30 years ago. And right now, the promise of private equity, to achieve returns of 20 per cent on invested capital, is why it is the flavour of the month for the owners of capital – while public companies, which return something close to half that result, are not.
This astonishingly uncomplicated measure – 10 per cent versus 20 per cent – on your capital is why Wesfarmers has taken its great leap forward into the world of private equity, complete with massive amounts of debt, hard-nosed business decisions and ultimately, the sale of assets surplus to requirements.
But it requires a lot more than capital and debt to achieve higher-than-average returns. It requires management skill.
It’s the hands-on skill, not debt or capital, which Wesfarmers brings to the table in an exercise whereby it will ‘rent out’ those skills to the owners of capital (private equity) in return for a fat fee, plus share of the profits from trading, or asset sales, or whatever variation achieves the Argenti principle of maximum shareholder return.
In one sense, this ‘buy-restructure-build-sell’ policy is nothing new for Wesfarmers; nor is its interest in retailing.
Decades ago, Wesfarmers owned the Charles Carters chain of supermarkets. It was an unhappy experience, undertaken largely as an extension of its rural trading roots. When Charles Carters failed to achieve a reasonable return on capital, it was sold.
After exiting the food business, Wesfarmers went retailing again through the Bunnings hardware chain.
Two lessons can be learned from these experiences: first, that retailing is nothing new to Wesfarmers; and second, that failure to hit required capital return targets is the kiss of death for a business, as has happened with rural trading itself (with the sale of the Landmark business to AWB) and the exit last year from a curious experiment in being a part owner of a railway operating system.
Now we have the start of the Coles experiment whereby Wesfarmers will form a joint venture with several private equity firms in a bid that has been described as the Perth-based conglomerate “betting” itself on a single deal.
Nothing could be further from the truth.
All that Wesfarmers has done is identify a big and troubled business in Coles, which needs a stiff dose of Argenti – the application of ruthless, shareholder-return-focus, business principles.
Better still, Wesfarmers has effectively been invited to the party by Coles and its major shareholders because it has: (a) created the bidding tension with the only current rival in the game, the US-based Kohlberg Kravis Roberts private equity group; (b) it is Australian and has no foreign investment concerns; and (c) it is not likely to incur any trade practices (anti-monopoly) issues.
But to follow these issues is a classic can’t-see-the-forest-for-the-trees exercise, because there is something far bigger, and more interesting, happening at Wesfarmers – the metamorphosis of the company from a simple public-listed structure into a hybrid public/private fund.
When (or should that be if) Wesfarmers and its friends successfully acquire control of Coles, the issues will crystallise into these – what assets are sold or kept and, who makes those decisions?
Last point first. The decision-making power on asset management and asset retention will lie squarely on the desk of Wesfarmers boss, Richard Goyder, for an easy reason – he’s the only hands-on manager in the bidding consortium, the rest are money lenders, or fund managers.
Wesfarmers has, in effect, become the operational arm of the private equity syndicate with the owners of the capital delighted to plug into the capital management discipline preached by Argenti and practised by Wesfarmers.
Armed with the treasure trove of Coles assets (plus a trolley load of associated rubbish), Wesfarmers will set about culling furiously, keeping the bits which will perform better in new hands, and selling the dross.
It is when the asset sales stage is reached that something really interesting will happen – and we are getting a country mile ahead of ourselves here.
When it reaches that fork in the road, Wesfarmers will opt to carve off pieces of Coles for itself with the Officeworks and Target retail chains seen as logical bolt-on additions to its Bunnings hardware business. Or, Wesfarmers could opt to run most of the Coles business, including its drab supermarket chain, and apply a stiff dose of Argenti on behalf of itself and its private equity partners.
It is this second possibility which most interests Briefcase, because it means that Wesfarmers will have taken the step to becoming a company that offers one thing that private equity lacks – management skill.
In theory, if Wesfarmers sticks to its speciality of disciplined capital management, it will not stop at the Coles deal because it is offering to private equity the all-important attributes that bankers and fund managers lack – an ability to actually run a business.
That is what Briefcase meant by saying earlier on that Wesfarmers is doing two things, renting out its management skills (for a price), and becoming an arm of the global private equity revolution while remaining a public listed company.
Can that structure survive, over time? Who knows.
But, nothing is more certain than this latest phase of the evolution of Wesfarmers being as interesting to watch as the earlier phases when the company made its move into fertiliser, hardware, coal, gas, and retail.
Coles, with the use of capital from private equity providers, is just another part of the perpetual re-invention of the Wesfarmers as it seeks to deliver maximum returns for its shareholders – and bring a smile to the dial of John Argenti.