Homebase - A Botched Takeover Highlights the Risks of External Growth Strategies

A cautionary tale here for multinationals wanting to grow in international markets using external growth strategies. Australian firm Wesfarmers have admitted they made a pretty disastrous decision to buy UK-based DIY chain Homebase in 2016. Wesfarmers shareholders are not happy!

Wesfarmers is the largest private employer in Australia, and operates a range of companies across diverse industry sectors including agriculture, retail, resources and insurance.

One of the businesses in Wesfarmers' portfolio is Bunnings, which has a 20% market share of the Australian retail DIY market.

It bought Homebase in 2016 for £340 million- a price that has subsequently proved to be far too high. 

Homebase, which currently has 250 stores in the UK is expected to make a loss of £97m in the last six months after a £54m loss in the year to June 2017. 

As a result, Wesfarmers has decided to write-off the cost of its investment in Homebase as well as make provisions for future losses and action to reduce Homebase costs. Around 40 Homebase stores are expected to close as a result of a rationalisation of the UK business to reduce ongoing operating costs and losses.

Shareholders in Wesfarmers are therefore nursing a £584m cost of what has proved to be a disastrous takeover.

What went wrong?

Obviously the price paid for the takeover was far too high. That is often the case with takeovers, and is a common reason why so many takeovers destroy rather create shareholder value.

Another reason is that Wesfarmers management misread the UK market, assuming that what worked for them in Australia would work in the UK.

The Managing Director of Wesfarmers is quoted as admitting it had ditched popular ranges in Homebase such as kitchens and bathrooms and ousted concessions such as Laura Ashley, Habitat and Argos without having alternatives in place.

Worse still, the “pace and nature of change had not been well received by Homebase customers”. Getting rid of the existing British management team also led to a loss of insight that had affected performance.

A salutary lesson in the risks of external growth!