Woolworths to keep Big W, spin off pubs

Woolworths chief Brad Banducci has vowed the supermarket giant will keep its struggling Big W chain.

Woolworths CEO Brad Banducci. Picture: Aaron Francis

Woolworths chief executive Brad Banducci has vowed the supermarket giant will keep its struggling Big W chain and grow its existing everyday foods and goods businesses after announcing a company-transforming deal to merge and then later spin off its $10 billion liquor, pubs and poker machines operations.

The liquor and gaming deal, codenamed Operation Swan, will see Woolworths’ existing joint venture with billionaire Bruce Mathieson’s Australian Leisure and Hospitality (ALH) combined with Endeavour Drinks to create an Endeavour Group with $10 billion in annual sales and EBITDA of about $1 billion from its pubs, gaming and liquor outlets such as Dan Murphy’s.

While Woolworths will maintain a 85.4 per cent share, it signalled it would seek to divest the majority of the business, most likely by spinning it out into an ASX-listed entity in 2020, leaving it with a supermarket and retail business with annual sales of about $47bn and EBITDA of about $2.7bn.

It means Woolworths would remain among the top 20 companies on the ASX and the merged Endeavour Group would be among the top 100, with Mr Banducci claiming the move was about ensuring both would be able to concentrate on their own, separate, growth strategies.

“The world of retail is changing, focus is needed, agility is needed, and we hope this achieves just that,” Mr Banducci told analysts yesterday.

“It is a big step in the future of Woolworths. We do it with the intent of creating long-term value for our shareholders.”

The core Woolworths business will concentrate on its 1020 supermarket and Woolworths metro stores, the Countdown chain in New Zealand and Big W in Australia, as well as online retail sales.

But Mr Banducci stopped short of saying Woolworths’ next move would be to offload the struggling Big W discount department chain after previously exiting the loss-making Masters hardware chain and last year selling its petrol chain for $1.7bn.

In April, Woolworths revealed Big W would lose up to $100 million for the second consecutive year and that it would close down 30 of its 183 Big W stores over the next three years, as well as two distribution centres, as it works to transform the struggling business and return it to profitability.

“No, not at all,” Mr Banducci said when asked if offloading Big W was being contemplated.

“We made some very tough calls on the business earlier this year … and we are very comfortable having it in our portfolio.”

Mr Banducci said the streamlined Woolworths group would be able to put greater effort into its digital platforms and e-retailing capabilities.

It was also likely to return money to shareholders via a special dividend or share buyback should it follow through with its strategy to offload most of Endeavour next year, as it previously did with the petrol sale.

Investors initially backed the announcement of the Endeavour deal, sending Woolworths shares up 2.7 per cent to a closing price of $33.82 per share. However, CLSA analyst David Lack said the transaction “is complex and the rationale not compelling, muddied by the intertwined nature” of the ongoing relationship between Woolworths supermarkets and adjacent BWS liquor stores.

Mr Banducci said a more formal fiscal relationship between Woolworths and Endeavour, under which the latter pays Woolies for its space and access to loading docks, would be established.