Woolworths’ ‘Project Swan’ spin-off deal ‘not compelling’

Gary Elphick does a deal in Dan Murphy’s. Picture: Jenny Evans

The Woolworths liquor and pubs demerger deal – dubbed “Project Swan” - has been described by CLSA analysts as complex, and the rationale “not compelling”.

But the analysts say it partly relieves the supermarket giant of any reputational damage from being a major poker machines operator.

Woolworths today announced plans to separate its Endeavour Group liquor business following the merger of Endeavour Drinks and its hotel joint venture ALH.

The merger is expected to take place in the next six months, with the separation to occur in the 2020 calendar year.

While the highly-anticipated transaction received a lukewarm response from analysts and fund managers, it has been applauded by ethical investors and gambling lobby groups who believe the move by Woolworths to distance itself from slot machines is a step in the right direction.

Working on the transaction for Woolworths was Citi and UBS while JPMorgan advised Woolworths’ joint venture partner in ALH, Bruce Mathieson.

Some fund managers say that the Woolworths liquor and hotel operations and its supermarkets are both solid but low growth businesses and they questioned how the transaction would add value.

“It adds cost and removes some benefit of diversification. The only positive is that they will no longer own pokies, but that wasn’t incorporated into any valuation discount,” said one market observer.

Woolworths described the rationale for the move as one where the supermarket chain will benefit from a simplified organisational structure, a greater focus on its core food and everyday needs markets, and opportunities to continue to build out the Woolworths retail ecosystem.

Separation will also allow the new Endeavour Group to realise its full potential through business simplification and efficiencies, with greater access to capital to pursue investment and growth, while retaining the benefits from a strong partnership with Woolworths.

CLSA said in a note that the transaction was muddied by the intertwined nature of the supermarket liquor and hotel operations.

“The transaction is complex and the rationale not compelling,” it said.

Woolworths liquor business BWS comprises 767 stores that are attached to a supermarket or hotel, while one-off separation costs add up to $275m.

The broker firm said that the costs were material, along with unquantified stranded costs and are reliant on being offset by unspecified future cost savings and growth opportunities.

“That Woolworths wishes to divest of liquor and hotels could suggest that these two businesses offer slimmer growth prospects than supermarkets.

“The main advantage we see is that it partly, but not entirely, relieves Woolworths of any reputational damage from being a major pokie machine operator.”

The demerger comes after the move was widely flagged by The Australian’s DataRoom, with the column reporting last month that a demerger was said to be imminent.