Wesfarmers CFO Anthony Gianotti: Adjusting hurdle rates dangerous

Wesfarmers says it is a ‘dangerous game’ reducing hurdle rates in response to cheap credit.

Reserve Bank governor Philip Lowe Picture: AAP

Wesfarmers says it is a “dangerous game” reducing hurdle rates in response to cheap credit over concern the move could see corporations overpay for deals at the expense of shareholders.

Reserve Bank governor Philip Lowe has urged businesses to take advantage of borrowing costs plunging to record-low levels and make investments with lower returns.

However, the Perth-based conglomerate said it was reluctant to “bank in” historically low interest rates into its long-term investment view.

“The danger is if people start factoring in lower discount rates — and lower hurdle rates — it actually pushes asset prices up,” Wesfarmers chief financial officer Anthony Gianotti told a conference in Sydney on Thursday.

“We’ve seen in the past where there have been asset bubbles and people overpaying for assets and that doesn’t end terribly well. One way to destroy a lot of shareholder value is to overpay for an acquisition.”

Wesfarmers paid $776m for lithium producer Kidman Resources in May and also splashed $230m on online retailer Catch Group the following month.

The Kmart owner said it did not have a fixed rate of return when it considered deals.

“We adjust our hurdle rates based on the risk in terms of what we’re looking at,” Mr Gianotti said. “So it’s very much a risk-based rate of return that we look for. We don’t have a fixed hurdle rate for everything that we look at.”

Woodside Petroleum finance chief Sherry Duhe said it was too soon to start rethinking hurdle rates, but Dexus finance boss Alison Harrop said the company was considering changes to its assumptions.

“The point about hurdle rates is a really interesting one for us,” Ms Harrop said at the conference. “We’ve done some interesting analysis on it and we’ve looked back on all of the property investments over the past 10 years, and basically we should have bought everything that came to us.”

Dr Lowe said late last month that it would be good to hear more companies adjusting their expectations for return on investments.