Woolworths’ spin-off of its Endeavour Group could return $2bn to shareholders

Woolworths will fill its shareholders’ pockets with up to $2bn in capital returns as well as shares in its demerged Endeavour Group drinks and hotels business.

Dianne Cummin at Dan Murphy’s in Hamilton, Queensland, which will be spun-off in the demerger. Picture: AAP

Woolworths will fill its shareholders’ pockets with up to $2bn in capital returns as well as shares in its demerged Endeavour Group drinks and hotels business, with the chief executives of both companies pledging a more successful future once they are unshackled from each other.

Presenting a new double act to the markets on Monday when Woolworths released the demerger booklet for its $10bn-plus separation of Endeavour Group, Woolworths chief executive Brad Banducci and Endeavour chief executive Steve Donohue made their joint case for shareholders to approve the historic separation deal. “What is very important to us is that there is a lot of mutuality of benefit in virtually everything we do,” Mr Banducci told The Australian when reflecting on the business links that will remain between his supermarkets and Mr Donohue’s bottle shops and pubs.

“If you look at a supermarket we know that a great supermarket always has a particularly great wine offer, so why would we open a supermarket that doesn’t have a good BWS either inside or directly next to it and visa versa? … these things go well together.”

Binding them together, even after the demerger, will be a partnership agreement lasting up to five years and covering shared services and platforms, from IT and finance to supply chain and fintech.

“It is worth noting it is not always easy even in the ownership (structure) that we have today and we have a way of working through the challenges that invariably pop up,” Mr Donohue, who will soon be running one of the nation’s biggest retailers, told The Australian.

“Actually most of it hangs off the respective culture of the teams that is mutual, so if people try to do the right thing by each other generally speaking in our group I think that will be perpetuated in the partnership.”

The two CEOs will now be joined at the corporate hip if the demerger is struck and then executed in July, with both recognising the complementary benefits of systems such co-locating supermarkets and bottle shops, sharing shopper data, other shared services and Woolworths being one of Endeavour Group’s biggest shareholders. But for now the duo are arguing a “better apart” strategy as the demerger plan, first announced in mid-2019 but delayed by the outbreak of the COVID-19 pandemic, picks up pace to be ready for the new financial year that is only six weeks away.

Woolworths’ spin-off plan was first unveiled in 2019. Picture: Joel Carrett

They both had one eye on fund managers and prospective investors as Endeavour Group emerges on July 1 — assuming shareholder approval — as a new top 50 company on the ASX that will compete for fresh capital and attention at a time when investors are thirsty for growth and yield.

For Mr Banducci his case ­centred around fashioning a ­simpler and more focused ­Woolworths, which could pay more attention and invest more funds into its flagship food and grocery arm once it waved goodbye to its liquor stores, hotels and pubs.

The added sweetener for his shareholders would be a capital return of $1.6bn to $2bn once the demerger is done and subject to trading conditions.

During Mr Donohue’s presentations to investors and analysts on Monday he campaigned on the strong growth potential for liquor and hotels, including the rollout of more Dan Murphy’s stores, the superior returns available from BWS outlets and leveraging its network of hotels, which includes unlocking the value in the $600m of freehold land on its books.

Mr Donohue, who has more than 25 years retail experience, starting as a store manager of a Dan Murphy’s when he was only 19, is also keen to flesh out a new and revitalised digital strategy for Endeavour Group that will boost its already fast-growing online sales.

Shares in Woolworths rose 3 per cent on Monday when it ­announced its highly anticipated demerger plans, with a ­shareholder vote to be held on June 18.

If approved the separation date will be June 28 and Endeavour Group shares will begin trading on the ASX on July 1.

The shares later closed up 2.7 per cent at $40.50.

Under the demerger plan Woolworths shareholders will be handed one share in Endeavour Group for every share that they have in the supermarkets retailer via an in-specie distribution. Following that the Woolworths board will consider a capital return of $1.6bn to $2bn.

Details of the planned demerger of Endeavour Group, which could be valued as high as $15 billion when its shares are slated to list on the market on July 1, were released by Woolworths on Monday, including a lengthy 231-page demerger booklet setting out the future of both Woolworths and Endeavour if the split is approved by shareholders.

Following the demerger, Woolworths will hold a 14.6 per cent interest in Endeavour Group and have a representative on its board. The shares Woolworths holds will not be in escrow.

The COVID-19 pandemic put the demerger process on ice last year.

However, with the equities market now booming, consumers brimming with confidence and household wealth on the rise, thanks to a buoyant housing market, it could prove perfect timing for the spin-out.

Endeavour Group, which owns the flagship Dan Murphy’s liquor chain, BWS, wine auction house Langton’s, Pinnacle Drinks beverages maker and has a hotels joint venture with the Mathieson family, will come to the market with sales of more than $10bn and promising a healthy dividend payout ratio of 70 per cent to 75 per cent of net profit.

The board of Endeavour Group was announced on Monday, with Holly Kramer, Bruce Mathieson Sr, Duncan Makeig, Joe Pollard, Colin Storrie and Catherine West appointed as non-executive directors-elect.

The proposed demerger is the final step in a process that involved the combination of Woolworths Group’s drinks and hospitality businesses to form Endeavour Group through a restructure of Endeavour Drinks and subsequent merger with ALH Group.

The demerger is supported by the Woolworths board and an independent expert appointed by Woolworths, Grant Samuel, has also concluded that the demerger is in the best interests of shareholders.

Woolworths chairman Gordon Cairns said the Woolworths board believed that a demerger of Endeavour Group would enhance shareholder value and create two leading ASX-listed companies.

“We believe both businesses, post-demerger, have strong future prospects and will benefit from greater simplicity, focus and ongoing partnership,” he said.

Moody’s Investors Service vice president Ian Chitterer said the firm believed Woolworths group remained firmly committed to its solid investment-grade credit ratings after its demerger, as outlined in the demerger documents lodged on the ASX.

“While the demerger will ­reduce the group’s scale and ­diversity, the likely pro-forma gross leverage leaves Woolworths very strongly positioned at its current ratings level,” Mr Chitterer said.