Morningstar | Last Drinks: Woolworths Pulling the Pin on Pubs
Woolworths Group is set to sharpen its focus even more on the core supermarkets segment via an intended divestment of its drinks and hospitality businesses. This follows the sale of the petrol businesses in April 2019. We don't expect any demerger to materially change Woolworths' competitive position. The firm's narrow economic moat is underpinned by buying power over competitors thanks to the scale benefits of Australia's largest supermarket. We make no change to our AUD 24.50 fair value estimate, and last trading at AUD 33.85, shares in Woolworths remain significantly overvalued.Woolworths intends to merge its bottle shops business, Endeavour Drinks, and pubs joint venture, ALH Group. These businesses together make up about 30% of consolidated EBIT. Wooloworths will initially own 85.4% of the combined entity, Endeavour Group, with the balance held by the current ALH Group minority shareholder Bruce Mathieson Group. The combined entity is earmarked for divestment in calendar 2020, although whether this happens through a demerger or some alternative is yet to be determined. We expect Woolworths to retain a minority shareholding.
After Coles' exit from the segment in March 2019, Woolworths has been under pressure to follow. This is largely because of its majority ownership of ALH Group, with exposure to electronic gaming machines. The gaming operations underpinning their pubs' profitability in ALH have long been a thorn in the side of Woolworths. The proposed transaction highlights an increasing focus of both investors and corporates on environmental, social, and governance, or ESG, factors.
Sales in the liquor and hotels segments rebounded in the third quarter, with strong adjusted like-for like growth in liquor of 5.9%. However, with an industrywide mix-shift to comparatively lower margin beer and spirits, away from the more profitable wine category, management expects a reduction in segment EBIT year on year.
The Endeavour Group merger should be complete by the end of calendar 2019. As ALH Group and Endeavour Drinks are already reported on a consolidated basis, the intended consolidation is immaterial to our earnings estimates.
Woolworths Group is organized into five segments: Australian Food and Petrol, which involves the procurement of food and petroleum products for resale to customers in Australia; New Zealand Supermarkets, which involves the procurement of food and liquor and products for resale to customers in New Zealand; Endeavour Drinks Group, which involves the procurement of liquor products for resale to customers in Australia; BIG W, which involves the procurement of discount general merchandise products for resale to customers in Australia; as well as Hotels, which involves the provision of leisure and hospitality services, accommodation, entertainment and gaming in Australia.
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