Woolworths to combine, then spin off, Endeavour and ALH

Woolworths denies its $10bn spin-off of Dan Murphy’s, pokies and pubs is to escape the gaming business.

The new combined company will include Dan Murphy's bottle shops.

Woolworths will combine its alcohol and pubs businesses and then spin them off, possibly through a demerger.

The supermarket giant said that it will combine its Endeavour Drinks with its hospitality business ALH and then pursue a “separation” of the new company, through a demerger or “other value-accretive alternative”.

Woolworths, which has already offloaded its petrol business, did not say whether it plans to sell or list the new alcohol and pubs business.

It insisted the move was not to distance itself from poker machines, as independent Federal MP Andrew Wilkie welcomed the supermarket giant’s exit from a “toxic” product.

CLSA analysts also said the “main advantage" of the deal “is that it partly, but not entirely, relieves Woolworths of any reputational damage from being a major pokie machine operator.”

But Woolworths chief executive said: “It’s not about gaming, it’s about helping both businesses unlock their full potential.”

Apart from pubs and poker machines, the new combined company will have hundreds of BWS and Dan Murphy’s liquor stories.

“The board believes that a merger of Endeavour Drinks and ALH followed by a separation, is in shareholders’ best interests and will benefit customers and team members of both groups,” chairman Gordon Cairns said in a statement.

“The decision has been taken after consideration of the future prospects of both businesses and how they can be best realised. It reflects the board’s focus on maximising long-term shareholder value.”

The merger and spin off is forecast to cost about $275 million, but that cost is expected to be neutralised through future cost savings from the changes.

At 11.30am (AEST), Woolworths was among the top performers on the ASX 200, after lifting 2.8 per cent to $33.86, while the broader market had gained 0.27 per cent.

Woolworths says the merger of Endeavour Drinks and ALH will create Australia’s largest integrated drinks and hospitality business, with sales of about $10 billion and EBITDA of $1 billion. Its stores will include over 1500 BWS and Dan Murphy’s retail drinks outlets and 327 ALH hotels.

Other businesses to be included in the merger include Endeavour Drinks’ own and exclusive brands business, Pinnacle Drinks; Langton’s, a fine wine auction and retail business; Cellarmasters, a wine subscription business; and an 8.7 per cent stake in ALE Property Group.

Mr Banducci played down the significance of poker machines, and their social impact, in the spin-off move. Rather, it was about unlocking the full potential of both businesses.

“We are working towards having a very strong sense of partnership between the two businesses,” he told an investor presentation.

Mr Banducci said that gaming represents just 7 per cent of sales for Endeavour, which has about 12,000 poker machines in a market of about 220,000 machines.

He said Endeavour represents about 25 per cent of the group’s EBITDA, but it only takes about 15 per cent of the company’s capital expenditure.

Mr Banducci said change would allow further investment in the drinks business and emphasised that both businesses would be looking to make investments on digital.

Bruce Mathieson Group, which owns a 25 per cent stake in ALH as part its joint venture with Woolworths, has agreed to swap its interest in ALH for a 14.6 per cent stake in the combined Endeavour Group and will maintain board representation if a demerger becomes effective.

Woolworths would retain a minority holding in a demerged Endeavour Group.

“Woolworths Group and BMG have enjoyed a long and successful partnership in ALH since 2004 which has created significant value for both sets of shareholders,” said Bruce Mathieson Snr, of Bruce Mathieson Group.

“This transaction is the natural evolution of the partnership and will allow Endeavour Drinks and ALH to reach their full potential.”

Bruce Mathieson. Picture: Stuart McEvoy

Woolworths said the separation of the drinks and pubs business would allow Woolworths to benefit from a more simplified structure, and allow it to focus more on its core food and “everyday needs” markets.

It would also allow Endeavour Group to simplify is business with greater access to capital to pursue investment and growth, while retaining the benefits from a strong partnership with Woolworths.

“Over the past three years we have progressively moved from a period of fixing the basics as part of our turnaround to investing for the future as part of our transformation,” Mr Banducci said.

“As we look to build customer differentiation in all of our businesses, and prepare for an agile and digitally-enabled future, we have decided to simplify Woolworths through a combination and subsequent separation of Endeavour Group.”

The merger of Endeavour Drinks and ALH is expected to be completed in the second half of calendar year 2019, subject to final board approval, third party consents, regulatory approval and completion of the restructure.

Woolworths expects to seek shareholder approval at its annual general meeting later this year.

A subsequent demerger or alternative transaction is currently expected to complete in calendar year 2020.

As part of the business changes, Woolworths CFO David Marr will move to the new role of chief operating officer.

Stephen Harrison, who is currently the company’s Australian food finance director will take over as Woolworths CFO from August 1.