Woolworths Group has announced it will combine its liquor and hospitality businesses – Endeavour Drinks and ALH Group – into a new company called Endeavour Group Limited and demerge it in 2020.
The merging of Endeavour Drinks and ALH will create Australia’s largest integrated drinks and hospitality business, with sales of approximately $10 billion and $1 billion EBITDA.
Endeavour Group will either be spun off to shareholders or sold to a new owner.
Woolworths has been under increasing pressure to distance itself from ALH, which is Australia’s largest poker machine operator.
Last month Liquor & Gaming NSW lodged complaints against two ALH hotels – Westower Tavern at West Ballina and South Tweed Tavern at South Tweed Heads – following an investigation into 50 ALH venues.
It also follows Coles inking a deal with KKR’s Australian Venue Co to manage its Spirit Hotels group.
The new business, called Queensland Venue Co, sees Coles take the profits from the bottle shops, while AVC takes the profits from the hotels and gaming operations.
SMH Business columnist Elizabeth Knight described the ASX announcement by Woolworths as: “The largest and most transformative transaction undertaken by the group in its 94-year history.”
“But shareholders will be surprised by the decision to get out of bottle shops – an area in which it has been very successful and has dominated its main rival, Coles,” she added.
“This will raise questions in some quarters about whether Woolworths is effectively throwing out the baby with the bathwater.”
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 Bruce Mathieson Group (BMG), 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.”
Woolworths Group said the separation would allow it 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 Group retail ecosystem”.
Woolworths Group CEO Brad Banducci noted: “Over the past three years we have progressively moved from a period of fixing the basics as part of our turnaround to investing for the future as part of our transformation.
“As we look to build customer differentiation in all of our businesses, and prepare for an agile and digitally-enabled future, we have decided to simplify Woolworths Group through a combination and subsequent separation of Endeavour Group.”
The new look Endeavour Group
Woolworths Group said Endeavour Group will have leading market positions, strong cash flow to fund investments in growth and an attractive and resilient revenue and earnings profile.
It will comprise highly integrated store-based and online offerings, with more than 1500 BWS and Dan Murphy’s retail drinks outlets and 327 ALH hotels.
ALH retail drinks outlets currently comprise approximately 35% of Woolworths Group retail drinks sales with 86 Dan Murphy’s and 512 BWS stores owned by ALH at the end of March 2019.
Other businesses to be included in the merger include Endeavour Drinks’ own and exclusive brands business, Pinnacle Drinks; Langton’s, a fine wine auction and retail business; Cellarmasters, a wine subscription
business; and an 8.7% stake in ALE Property Group.
Among the priorities for the Endeavour Group moving forward will be:
>> Simplifying into a more customer-centric operating model to create a leaner and more customer focused business across Endeavour Drinks and ALH.
>> Further developing its retail drinks and hospitality network to capitalise on network growth opportunities, ramp-up its renewal program and continue new store openings.
>> Leverage the store network and digital capabilities to increase online penetration and continue to rapidly expand drive up and last-mile delivery and use rewards to drive personalisation
>> Curate range for local customers and selectively build out the portfolio of exclusive Pinnacle brands.
>> Unlock the property development potential of its existing real estate and develop key existing venues into large-scale mixed use and accommodation properties.
While the new company will be separated, it will keep a relationship with Woolworths in many areas, including loyalty schemes and infrastructure.
Woolworths Group is also expected to retain a minority stake reflecting the importance of the partnership.
Inside the merger implementation
BMG has agreed to swap its interest in ALH (including all contractual entitlements) for a 14.6% stake in the combined Endeavour Group and will maintain Board representation in the event that a demerger becomes effective.
Woolworths Group said it expects to retain a minority holding in a demerged Endeavour Group reflecting the importance of the ongoing partnership.
The merger of Endeavour Drinks and ALH is expected to complete in the second half of calendar year 2019, subject to final Board approval, third party consents, regulatory approval and completion of the restructure.
The process of restructure of Endeavour Group is expected to be subject to Woolworths Group shareholder approval. It is currently anticipated that shareholder approval will be sought at Woolworths Group’s 2019 AGM.
A subsequent demerger or alternative transaction is currently expected to complete in calendar year 2020.
Management changes announced
As part of the separation process, David Marr, Woolworths Group CFO will move to the new role of Chief Operating Officer, Woolworths Group, with primary responsibility for overseeing the merger and subsequent separation of Endeavour Group.
Stephen Harrison, currently Finance Director, Australian Food, will take over from David as Woolworths Group CFO, effective August 1.
Colin Storrie, Woolworths Group Portfolio Director, will continue to lead the shareholder aspects of the transaction.
On the management changes, Brad Banducci, Woolworths Group CEO, said: “David has been Woolworths Group CFO for five and half years and has made a significant contribution to the Group over this period. Given
the commitment required to oversee the merger and separation process, we have asked David to make this his primary focus.
“We are delighted that we have someone of Stephen Harrison’s calibre to take over as CFO, which is testament to the Group’s strong talent pool and succession planning process. Stephen’s experience as finance director for Endeavour Drinks and subsequently Woolworths Supermarkets and Australian Food (including WooliesX) will be invaluable in his new role.
“Finally, I would also like to recognise the efforts of Colin Storrie and the Portfolio team over the last 12 months, who in addition to managing the sale of our Petrol business, have overseen the extensive preparation work relating to this transaction.”