Slimming down has benefits
WESFARMERS appears willing to shrink in order to boost returns and will be well placed to pull the trigger on a $3.5 billion share buyback following the Coles demerger, analysts say.
And the group is likely to shut 46 Target stores and convert another 11 to Kmart outlets as it transforms Target into a mid-range fashion destination aimed squarely at the market claimed by interlopers H&M, Uniqlo and Zara, a leading investment bank says.
Analysts yesterday delivered a generally positive report card on the first Wesfarmers strategy day hosted by chief executive Rob Scott this week.
The Perth-based conglomerate owns Coles, Bunnings, Kmart, Target, Officeworks and a range of resources, workwear and industrial businesses.
It is in the process of spinning off Coles into a separate company listed on the Australian bourse and has called time on its failed Bunnings experiment in the UK and Ireland.
Both moves will give Wesfarmers the cash to either engage in buyouts or boost returns to shareholders, industry experts say.
Citi analyst Bryan Ray- mond said Mr Scott’s strong comments around spending discipline indicated Wesfarmers’ new chief was tilting towards returning cash to shareholders rather than targeting a major acquisition.
“Management has watered down expectations of imminent merger and acquisition activity as the opportunity would need to be ‘very compelling’,” Mr Raymond said in a report for investors.
“Wesfarmers has consolidated its portfolio of businesses over the past six months and is messaging to the market a clear focus of capital discipline.”
Mr Raymond said Wesfarmers appeared well placed to undertake a $3.5 billion share buyback and remain in line with credit-rating thresholds when Coles was spun out next financial year.
Companies often carry out buybacks — where they buy then shred some of their own shares — in an attempt to boost their share price by bolstering the demand for and reducing the supply of the stock.
Alternatively, Wesfarmers could fund a $5 billion takeover without the need to raise new equity or breach its creditrating metrics, Mr Raymond said.