[#24]
Thinking exercise: Wesfarmers merger and acquisition play
Building on my previous post on 7 January 2023 (Post #: 65573004).
More of a thinking exercise than anything else, but some thoughts below:
The Wesfarmers business is somewhat largely influenced by Bunnings which contributes 48 per cent to aggregate revenue. Combining Bunnings, Kmart, and OfficeWorks and those 3 contribute 83 per cent of total revenue.
During financial year 2021/22, Wesfarmers reported revenue of $36.8 billion of which:
Bunnings contributed 48 per cent
Kmart contributed 26 per cent
Officeworks contributed 9 per cent
Chemicals, energy, fertilisers contributed 8 per cent
Industrial safety contributed 5 per cent
Health contributed 9 per cent
Hypothetically, if Wesfarmers consolidated with Mineral Resources, Seven Group, and Incitec Pivot, Bega, Sonic Health, Qube, Elders, NRW, Vulcan Steel, then the combined business would be considerably more diversified while maintaining similar dividend distributions as current.
|
| Wesfarmers (current) | Mineral Resources (current) | Seven Group (current) | Incitec Pivot (current) | Bega (current) | Sonic Health (current) | Qube Logistics(current) | Elders (current) | NRW (current) | Vulcan Steel (current) | Wesfarmers (hypothetical) |
|---|
| 1 | Shares on issue | 1,134,514,310 | 189,780,300 | 363,260,588 | 1,942,225,029 | 303,898,577 | 480,898,313 | 1,765,762,524 | 156,476,574 | 449,193,530 | 131,408,572 | 2,357,845,017 |
|---|
| 2 | Share price | $48.00 | $90.00 | $23.00 | $4.00 | $4.00 | $31.00 | $3.00 | $10.00 | $3.00 | $9.00 | $48.00 |
|---|
| 3 | Market capitalisation | $54,456,686,880 | $17,080,227,000 | $8,354,993,524 | $7,768,900,116 | $1,215,594,308 | $14,907,847,703 | $5,297,287,572 | $1,564,765,740 | $1,347,580,590 | $1,182,677,148 | $113,176,560,816 |
|---|
| 4 | Revenue | $36.84 b | $3.42 b | $8.01 b | $6.31 b | $3.00 b | $9.34 b | $2.48 b | $3.44 b | $2.37 b | $0.89 b | $76.10 b |
|---|
| 5 | Profit | $2.35 b | $0.35 b | $0.55 b | $1.01 b | $0.05 b | $1.46 b | $0.15 b | $0.16 b | $0.09 b | $0.11 b | $6.29 b |
|---|
| 6 | Dividend | $1.80 | $2.75 | $0.46 | $0.27 | $0.11 | $1.00 | $0.08 | $0.56 | $0.13 | $0.57 | $1.75 |
|---|
| 7 | Yield | 3.8% | 3.1% | 2.0% | 6.8% | 2.8% | 3.2% | 2.7% | 5.6% | 4.2% | 6.4% | 3.6% |
|---|
| 8 | Price-to-earnings ratio | 23.2 | 48.7 | 15.2 | 7.7 | 24.3 | 10.2 | 35.3 | 9.8 | 15.0 | 10.4 | 18.0 |
|---|
Market capitalisation
Wesfarmers $55 billion
Mineral Resources $17 billion
Seven Group $8 billion
Incitec Pivot $8 billion
Bega $1.2 billion
Sonic $15 billion
Qube $5 billion
Elders $1.6 billion
NRW $1.3 billion
Vulcan Steel $1.2 billion
Hypothetical Combined Wesfarmers $113 billion
Hypothetical Combined Wesfarmers
2,357,845,017 shares outstanding
$48.00 share price
$1.75 dividend distribution per year
3.6 per cent dividend yield
$76 billion revenue per year
$6.29 billion profit per year
Selected major shareholders
Kerry Stokes, 4.21 per cent ownership interest
Chris Ellison, 1.79 per cent ownership interest
Hypothetical Combined Wesfarmers revenue by business unit 2021/22
Bunnings contributed 23 per cent
Kmart contributed 13 per cent
Officeworks contributed 4 per cent
Chemicals, energy, minerals, fertilisers contributed 17 per cent
Industrial safety, equipment, construction materials contributed 14 per cent
Health contributed 14 per cent
Food and agribusiness contribute 8 per cent
Transport contribute 3 per cent
Construction contribute 3 per cent
Such a business would be significantly more diversified and potentially in a position to better allocate capital to growth projects/businesses as well as realise synergies between (eg. logistics, material sourcing via vertically integrated supply chains, constructing new projects, etc).
In terms of ASX market cap comparable, the Hypothetical Combined Wesfarmers business would become the 4th most valuable business behind BHP, CBA, and CSL leaping ahead of NAB, Westpac, ANZ, Fortescue, Woodside, and Macquarie from its current 10th position. Not that size matters (other than economies of scale), but more so the underlying businesses.
In terms of valuation, the current Wesfarmers business is priced by the market at a price-to-earnings ratio of around x23 times, whereas the individual businesses the Hypothetical Combined Wesfarmers are around x18 times. If the current premium were maintained in a Hypothetical Combined Wesfarmers case, then the Wesfarmers share price would be around $61.74. This would create an uplift of around 29 per cent in value for both existing Wesfarmers shareholders and shareholders in businesses Wesfarmers merges as part of Hypothetical Combined Wesfarmers.
Reiterating this was more of a thinking exercise than anything else — but a business with such diversification would be the pinnacle representation of the Australian economy bar financials/banking exposure.
— DK.. just some thoughts, do your due diligence and decide your own actions.
(20min delay)