Wesfarmers has agreed a deal to divest troubled retail business Homebase UK and Ireland to a company associated with investment specialist Hilco Capital for £1.
Under the terms of the agreement, the buyer will acquire all Homebase assets, including the Homebase brand, its store network, freehold property, property leases and inventory for a nominal amount.
The 24 Bunnings pilot stores will convert to the Homebase brand promptly following completion and Wesfarmers will participate in a value share mechanism whereby it would be entitled to 20% of any equity distributions from the business.
This obligation is not limited by time, allowing Wesfarmers to participate in any profitable divestment of the business in the long-term.
With the conclusion of the review, Wesfarmers says it expects to record a loss on disposal of £200-£230 million in the group’s 2018 full-year financial results, subject to completion and review by Ernst & Young.
The divestment is expected to be completed by June 30 2018.
Richard Lim, chief executive of research analyst Retail Economics, said: “The acquisition of Homebase has been an unbelievable disaster for Wesfarmers. Their attempts to disrupt the UK DIY market have failed after a series of woeful management decisions, clumsy execution and a misguided perception of the UK market.
“There’s no doubt that the timing has been ill-fated as the sector faces incredibly tough headwinds. Against this backdrop, the business is bleeding cash and the owners have decided enough is enough. Unfortunately, the restructuring will almost inevitably lead to store closures and more job losses on the high street.”
Wesfarmers managing director Rob Scott said the agreement follows a comprehensive review of the Bunnings United Kingdom and Ireland (BUKI) business which considered a range of options to improve shareholder returns.
“A divestment under the agreed terms is in the best interests of Wesfarmers’ shareholders and will support the ongoing reset and repositioning of the Homebase business,” Scott said.
“While the review confirmed the business is capable of returning to profitability over time, further capital investment is necessary to support the turnaround. The materiality of the opportunity and risks associated with turnaround are not considered to justify the additional capital and management attention required from Bunnings and Wesfarmers.
“Homebase was acquired by Wesfarmers in 2016. The investment has been disappointing, with the problems arising from poor execution post-acquisition being compounded by a deterioration in the macro environment and retail sector in the UK. While it is important that we learn from this experience, this should not discourage our team from being bold and diligent in pursuing opportunities to create shareholder value.
“We acknowledge the past six months have been particularly challenging for the BUKI management and our team members in the UK and Ireland and we thank them sincerely for their hard work and commitment. The operating performance of the business has improved in recent months under the new management team led by Damian McGloughlin and he will continue to lead Homebase in delivering management’s turnaround plan.
“We wish Damian and the team well during the transition and as they take the business into its next chapter under a new owner with a track record of retail turnaround in the UK.”