Woolworths Group to drop drinks and hospitality arms after merger

Australian retail operator Woolworths Group, owner of the Dan Murphy’s and BWS alcohol chains, is planning to merge its drinks and hospitality arms into a separate company worth AU$10 billion (US$7bn), which it will offload.

Australian alcohol chain Dan Murphy’s will become part of Endeavour Group, following the merger

The merger of Endeavour Drinks and Australian Leisure & Hospitality (ALH) Group, Woolworths’ hospitality division which includes its gaming operations, would create “Australia’s largest integrated drinks and hospitality business” with sales of around AU$10bn and EBITDA of AU$1bn (US$702m). The single entity will be referred to as Endeavour Group.

The merger is expected to be completed during the second half of 2019, subject to final board approval, third party consents, regulatory approval and completion of the restructure.

Following the merger, Woolworths Group “intends to pursue a separation of the business through a demerger or other value-accretive alternative”.

The divestment will allow the Australian operator to focus on its “core foods and everyday needs markets and opportunities to continue to build out the Woolworths Group retail ecosystem”.

It will also provide Endeavour Group with “greater access to capital to pursue investment and growth”, while benefitting from its “strong partnership” with Woolworths Group.

The separation is estimated to take place in the 2020 calendar year.

Sydney-headquartered Woolworths Group operates alcohol chains BWS and Dan Murthy’s, wine delivery service Cellarmasters and Langton’s wine auction and retail business under its Endeavour Drinks arm. Together, BWS and Dan Murphy’s has more than 1,500 alcohol stores.

As a result of the merger, Endeavour Group “will have leading market positions, strong cash flow to fund investments in growth and an attractive and resilient revenue and earnings profile”.

ALH manages 323 licensed venues and more than 537 retail liquor outlets across Australia, including restaurants, bistros, cafes, electronic gaming, nightclubs, accommodations and wagering. It operates 327 hotels.

ALH’s retail drinks outlets currently comprises around 35% of Woolworths Group’s retail drinks sales with 86 Dan Murphy’s and 512 BWS stores owned by ALH at the end of March 2019.

Woolworths entered the hotel industry in 2005 through a joint venture with hotel operator Bruce Mathieson, resulting in the purchase of ALH Group. Later in 2005, ALH expanded its portfolio to 250 hotels with the acquisitions of the Taverner Hotel Group and the Bruce Mathieson Group.

‘Natural evolution’

Woolworths Group chairman Gordon Cairns said: “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.

“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.”

Bruce Mathieson Senior of the Bruce Mathieson Group, Woolworths Group’s joint venture partner in ALH, said: “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.

“This transaction is the natural evolution of the partnership and will allow Endeavour Drinks and ALH to reach their full potential. We look forward to continuing the partnership for many years to come.”

In addition to these brands, the merger will include Endeavour Drinks’ exclusive brands business Pinnacle Drinks and a 8.7% stake in real estate company ALE Property Group.

Merger implementation BMG has agreed to trade its interest in ALH for a 14.6% stake in Endeavour Group and will retain board representation in the event that a demerger becomes effective.

Woolworths Group expects to preserve a minority holding in the demerged Endeavour Group, “reflecting the importance of the ongoing partnership”.

As part of the separation process, David Marr, Woolworths Group’s chief financial officer (CFO) will take on the new role of chief operating officer of Woolworths Group, with primary responsibility for overseeing the merger and subsequent separation of Endeavour Group.

Finance director of Australian Food Stephen Harrison will take over from Marr as Woolworths Group CFO, effective 1 August.

Marr will continue to support Harrison during a transition period including the delivery of the full-year results. Colin Storrie, Woolworths Group portfolio director, will continue to lead the shareholder aspects of the deal.

Last month, not-for-profit organisation the Foundation for Alcohol Research and Education (FARE) called for an “ill-conceived” partnership between Australian alcohol chain BWS and cancer charity Dry July Foundation to be terminated.