Woolworths Endeavour liquor spin-off could hit $15bn

Woolworths could release as early as Monday the demerger documents for the highly anticipated spin-off of its hotels and drinks business Endeavour Group.

Endeavour Group’s earnings, especially its flagship Dan Murphy’s and BWS liquor chains, have proved their worth through the COVID-19 pandemic. Picture: Jenny Evans

Woolworths is set to release as early as Monday demerger documents for its highly anticipated spin-off of its hotels and liquor retailer Endeavour Group, dangling before investors thirsty for a growth company with a history of rising earnings and the potential for strong yield a new investment option on the market.

The supermarket majors will hit fund managers and investors this week with its Endeavour Group proposal just at the right time when a strong tailwind of resilient trading conditions for its liquor chains including the flagship Dan Murphy’s through COVID-19 and a rebound in hotel revenue is backing Endeavour.

It is firming up to be one of the biggest demergers on the ASX since Wesfarmers spun out its Coles supermarkets chain in a capital deal worth around $18 billion in 2018, with Endeavour Group initially valued at $10bn when Woolworths first unveiled the plan in mid-2019 but present frothy market conditions now pushing out that valuation.

When its shares begin trading in less than eight weeks it could see the market value the Endeavour Group as high as $15bn, driven by enthusiasm for the quality earnings thrown off by the drinks and pubs business and reflective of the buoyant values for consumer goods companies at the moment.

Shareholders in Woolworths will be offered one share in Endeavour Group for every one share they currently hold in the supermarket giant as part of an in-specie distribution, a source within the company told The Australian, and that demerger documents should be available this week.

The mood within Woolworths is that a resurgent Australian domestic economy, confident consumers happy to spend and growing household wealth through higher property prices and a rising sharemarket has provided the perfect opportunity to demerge Endeavour Group.

Endeavour Group’s earnings, especially its flagship Dan Murphy’s and BWS liquor chains, have proved their worth through the COVID-19 pandemic with record earnings growth and this has put a rocket under the division’s overall valuation.

It is expected that when Endeavour Group eventually lists on the ASX, expected around June, it could attract a valuation as high as $15bn. This valuation has been strengthened by informal takeover offers made for the hotels and liquor business including one recent speculated bid of around $14bn for the business.

Investors and the market have become increasingly excited about the expected spin off of Endeavour Group, the arm of Woolworths which holds its hotels joint venture with the Mathieson family as well as its Dan Murphy’s liquor chain and a stable of other wine businesses such as auction house Langtons. This excitement has risen as further evidence appears of strengthening sales of liquor through the COVID-19 crisis as well as now a return to much better trading at the hotels.

A spokesman for Woolworths told The Australian the Endeavour Group demerger remains on target for late June.

“Key milestones during the quarter include securing financing commitments for Endeavour Group’s proposed debt facilities and finalising board and management appointments which will be announced in due course. Subject to board and regulatory approval, demerger documentation is expected to be released in mid-May.“

In 2019 Woolworths unveiled its plans to demerge its hotels and liquor arm, claiming the separation will allow Woolworths to 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 Endeavour Group to realise its full potential through business simplification and efficiencies with greater access to capital to pursue investment and growth, Woolworths said at the time.

In late 2019 Woolworths obtained shareholder approval to begin the demerger process for Endeavour Group. Following a restructure, the 75 per cent stake Woolworths had in the hotels business, ALH, was merged with its drinks arm – which takes in Dan Murphy’s, BWS, Langtons and other liquor business units – to create Endeavour Group, which is 85.4 per cent-owned by Woolworths and 14.6 per cent by pubs mogul Bruce Mathieson and his company.

Woolworths is expected to call a shareholder meeting for June to vote on the demerger and in-specie distribution of stock to investors.

It will bring to the market a giant retailer that can match the firepower of some of the biggest and most well-known national retail companies currently on the ASX. Endeavour Group is expected to generate more than $10.5bn in annual revenue and almost $1bn in earnings.

The decision to delay the Endeavour Group demerger looks to have been the right one, allowing it to now hit the market when equities are on a bull run and cashed up consumers are resuming their social activities which includes visiting pubs and hotels and enjoying drinks with friends and families.

This is showing up in Endeavour Group’s most recent trading. At its March quarter trading update, Woolworths said its Endeavour Drinks arm (Dan Murphy’s, BWS, etc) posted a total sales increase of 6.3 per cent for the quarter after increasing 14.4 per cent in the first seven weeks of the period.

Hotels sales rose 11.5 per cent for the quarter as many venues came out of a COVID-19-induced hibernation and are now reopening to customers.