Regulatory Story
Go to market news section View chart   Print
RNS
Home Retail Group Plc  -  HOME   

Proposed sale of Homebase

Released 07:00 18-Jan-2016

RNS Number : 1327M
Home Retail Group Plc
18 January 2016
 

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, IN WHOLE OR IN PART, IN, INTO, OR FROM ANY JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OF THAT JURISDICTION

 

Proposed Sale of Homebase for a Cash Consideration of £340 million

 

Summary

·      Home Retail Group plc ("Home Retail Group", the "Company" or the "Group") announces  today that it has entered into a share purchase agreement to sell Homebase to Bunnings  (UK&I) Holdings Limited, a subsidiary of Wesfarmers Limited ("Wesfarmers") for cash  consideration of £340m (the "Transaction").

·      The Transaction realises good value for shareholders and will enable the remaining group  (the "Retained Group") to focus on the ongoing Transformation Plan at Argos.

·      The Group intends to return net cash proceeds of approximately £200m to shareholders,  after taking account of payments totalling £50m to the Home Retail Group Pension Scheme,  and transaction, separation and restructuring costs of approximately £75m.

·      The directors of Home Retail Group have unanimously agreed to recommend the Transaction  and each director has given an irrevocable undertaking that they will vote their own shares  in favour of the Transaction.

·      The Transaction is subject, amongst other things, to approval by the syndicate of banks that  provide the Group's revolving credit facility of £250m and the Group's shareholders, with  completion expected in the first calendar quarter of 2016.

 

John Coombe, Chairman of Home Retail Group, said, "We are very pleased to have reached agreement with Wesfarmers regarding the sale of Homebase. We believe that this is the best deal for shareholders and for the business. Wesfarmers is an experienced and successful retailer with exciting plans to invest in and grow their presence in the UK through Homebase. This Transaction crystallises value for our shareholders from our ownership of Homebase and specifically the work that we have been doing through the Productivity Plan. Following completion of this Transaction, the Board will remain focused on the continuing transformation of our Argos business and the options for delivering shareholder value, supported by a strong overall financial position."

 

The disposal and capital return are conditional, amongst other things, upon the approval of shareholders. A circular containing further details of the proposed Transaction, the proposed return of capital and containing the notice convening a general meeting, will be sent to Home Retail Group shareholders as soon as practicable.

 

This summary should be read in conjunction with the full text of this announcement. 

 

Enquiries:

Analysts and investors (Home Retail Group)

Richard Ashton        Finance Director              01908 600291

Mark Willis              Director of Investor Relations

 

BofA Merrill Lynch - Financial Adviser and Corporate Broker

Jonathan Bewes                                 020 7628 1000

Eamon Brabazon

Geoff Iles

Luke McMullan

 

Media (RLM Finsbury)

Rollo Head                                          020 7251 3801

 

Notes to Editors:

 

1.   About Home Retail Group plc

Home Retail Group is the UK's leading home and general merchandise retailer with sales of around £5.7 billion in the financial year to 28 February 2015. It sells products under three distinct and complementary retail brands - Argos, Homebase and Habitat. The Group employs around 47,000 colleagues across the business. For more information visit www.homeretailgroup.com.

 

2.   About Wesfarmers Limited

Wesfarmers is a diversified conglomerate listed on the Australian Securities Exchange (ASX) with a market capitalisation of approximately A$44 billion. Headquartered in Western Australia, its business operations cover: supermarkets, liquor, hotels and convenience; home improvement and office supplies; department stores; and an industrials division which has businesses in chemicals, energy and fertilisers, coal, and industrial and safety products. It is Australia's largest private sector employer with approximately 210,000 employees. The group incorporates Bunnings, a leading home improvement and outdoor living retailer in Australia and New Zealand, with revenue of A$9.5 billion in the year to 30 June 2015. 

 

3.   Cautionary statement

Merrill Lynch International ("BofA Merrill Lynch"), a subsidiary of Bank of America Corporation, is acting exclusively for Home Retail Group in connection with the Transaction and for no one else and will not be responsible to anyone other than Home Retail Group for providing the protections afforded to its clients or for providing advice in relation to the Transaction.

 

4.   Publication on website

A copy of this announcement will be available on the Company's website at www.homeretailgroup.com/investor-centre by no later than 12 noon (London time) on 19 January 2016.

 

 

 

Proposed Sale of Homebase for a Cash Consideration of £340 million

 

1.  Introduction

Home Retail Group plc ("Home Retail Group", the "Company" or the "Group") announces today that it has entered into a share purchase agreement to sell Homebase to Bunnings (UK&I) Holdings Limited, a subsidiary of Wesfarmers Limited ("Wesfarmers") for cash consideration of £340m (the "Transaction").

 

Under the share purchase agreement, Wesfarmers will acquire the entire Homebase business, including all its stores and dedicated distribution centres. Product brands owned by the Group, such as Habitat, Schrieber and Hygena will be excluded from the sale, but certain of these brands will be licensed for use by Homebase for one year.

 

Following completion of the Transaction, after payments totalling £50m to the Home Retail Group Pension Scheme, and the payment of transaction, separation and restructuring costs of approximately £75m, it is the Company's intention to return substantially all of the net proceeds of approximately £200m to shareholders.

 

The directors of Home Retail Group have unanimously agreed to recommend the Transaction and each director has given an irrevocable undertaking that they will vote their own shares in favour of the Transaction.

 

The disposal and capital return are conditional, amongst other things, upon the approval of shareholders. A circular containing further details of the proposed Transaction, the proposed return of capital and containing the notice convening a general meeting will be sent to Home Retail Group shareholders as soon as practicable.

 

2.  Background to and Reasons for the Transaction

The proposed sale of Homebase follows from a review of the business in 2014, initiated by the Board and the Group's then-new chief executive, who introduced a 3-year Productivity Plan that included improving store productivity, closing approximately 25% of the store estate, strengthening customer propositions and accelerating Homebase's digital capabilities. Significant progress has been made against the Productivity Plan since then, including the substantial completion of the programme to close underperforming stores, promotion and range improvements to drive positive trade, significant growth in digital sales, and an energised new leadership. Homebase is on track to become a smaller, stronger business which is better positioned to support future investment and realise its potential for greater growth.

 

Home Retail Group and Wesfarmers began discussions in September, due diligence commenced under a confidentiality agreement in October, and Wesfarmers provided the Group with a firm offer letter in November.

 

The Board is cognisant of the value created in Homebase over a short period through the successful progress on the Productivity Plan, as well as the investment, management attention and other resources required to help grow Homebase further.  Additionally, the Board continues to believe that the Argos Transformation Plan is the Group's greatest potential source of shareholder value, and its successful execution will require focus and resources. The Productivity Plan preserved the option to sell Homebase in the event that circumstances proved appropriate.

 

Against this background, and with recognition of the impact of the Transaction on both the balance sheet and the profit & loss account of the remaining business (the "Retained Group") as indicated in paragraph 5 below, the Board believes that the cash consideration of £340m represents an attractive value for the business and that the sale to Wesfarmers is in the best interests of shareholders and Homebase.

 

3.  Information on the Retained Group

In October 2012 Argos outlined a five-year Transformation Plan to reinvent itself as a digital retail leader, transforming from a catalogue-led business to a digitally-led business. The Transformation Plan addresses competitive challenges and aims to exploit emerging market opportunities and restore sustainable growth. 

 

There are four key strategic elements to the Transformation Plan:

 

·     Provide more product choice, available to customers faster - Fulfilment remains highly competitive amongst retailers. Argos is uniquely positioned through its store estate and supply chain to provide market-leading fulfilment options to customers on a national scale.

·     Reposition Argos' channels for a digital future - Growth in digital channels is expected to outpace the market generally. By focussing on and leading in these channels Argos believes it can secure future growth. Stores remain a strategic advantage for Argos as local points of collection and customer service; however their role is being adapted to support a digital offer. 

·     Develop a customer offer that has universal appeal - Historically Argos' offering has been biased towards less affluent customers. By providing products, pricing, marketing programmes and customer experiences that are more appealing across the range of our customers, Argos has a significant opportunity to grow the business.

·     Operate a lean and flexible cost base - Stores are one of Argos' biggest costs. Historically lease terms have been long and inflexible, yet customer usage of stores is changing and space requirements are less predictable. Reducing the lease terms across the estate will provide flexibility to adjust the estate as required.

 

Argos has made meaningful progress on its Transformation Plan and in developing new strategic capabilities since its introduction:

 

·     A national hub & spoke distribution network which currently supports c.20,000 products in local hubs, making them available for faster fulfilment via home delivery or store collection. Argos has recently further extended this concept to a regional hub trial, with potential to hold substantially more products, including third party products, for same day fulfilment.

·     Introduction of FastTrack Delivery and FastTrack Collection, market-leading home delivery and store collection propositions that leverage hub & spoke, 844 Argos store locations, and a national home delivery network, offering c.20,000 products for immediate store collection or same day home delivery to c.95% of UK mainland households. Argos has also introduced an express two-man home delivery service offering leading large item delivery across a broad range of products.

·     Proven digital store model, including small formats and concessions, which require lower capital outlay and provide customers with fast access to an expanded product range regardless of store stocking capacity. Argos recently extended the concession model to begin trialling collection via convenience stores that hold no Argos stock.

·     Digital development and digital channel capabilities. Although the Internet is now central to most businesses, the market has both broad variation in digital standards and a shortage of sufficient digital leadership capability. Argos has developed teams with strong digital capabilities, and aggressively shifted the business from a catalogue retailer to a digital specialist.

·     Partnership with EBay, which provides over 200,000 EBay merchants with access to Argos' click and collect capabilities, driving footfall into Argos stores. The partnership has also been recently extended to include the trial of a consumer-to-consumer parcel drop-off service. 

·     More universally appealing offer, including expanded ranges and marketing communications that are beginning to reposition the Argos brand among consumers as more dynamic, while preserving its strong heritage.

·     A more flexible store cost base, with substantial reductions in the average lease term of Argos stores to below five years, combined with new options for store locations presented by small stores and concessions, Argos has the flexibility to add, eliminate and relocate stores to minimise costs and meet previously unaddressed consumer demand.

 

Financial Services works in conjunction with Argos to provide its customers with the most appropriate credit offers to both drive retail sales and ensure appropriate customer outcomes.

 

Argos and the Financial Services business are expected to continue to operate as they did prior to the Transaction, providing market-leading convenience options across its digital and store channels, access to a broad range of products and related financial services at competitive prices, with a priority focus on successfully executing the Transformation Plan.

 

4.  Information on Homebase

Homebase was founded in 1979 and was acquired by GUS plc in 2002. The Homebase business was subsequently demerged from GUS plc as part of the Home Retail Group in 2006 and has grown to become a leading home and garden improvement retailer, offering a growing range of products in a differentiated store environment. The business carries out approximately 60 million customer transactions a year, selling around 38,000 products for the home and garden as well as offering installation services and DIY advice. It currently has 265 large, out-of-town stores throughout the UK and Republic of Ireland and a growing internet offering at www.Homebase.co.uk.

 

The Homebase strategy, as set out in the Productivity Plan, announced in October 2014 focuses on the following:

·     Enhancing store productivity through a targeted reduction in the size of the store estate and associated reductions in both distribution and central costs.

·     Improving store and customer experience standards, the competitiveness of customer propositions, promotional and pricing improvement and range development.

·     Improving Homebase's digital readiness, beginning with the basic features of its digital offering.

 

Homebase has made progress against all of these aspects in the period since the Productivity Plan was announced in October 2014, including:

·     The closure of approximately 60 stores through a combination of lease expiries and other specific property transactions, reducing the store portfolio to 265 stores. 

·     Reduced the head office and support costs, and closed a distribution centre thereby reducing depot space and increasing network efficiency.

·     Improved customer availability year on year while also simplifying the stockroom and replenishment processes to improve store productivity.

·     Improved pricing structure and promotional effectiveness by removing certain blanket discount events, and replacing them with more targeted, seasonally relevant promotions, and continuing to test and selectively reduce prices in critical areas. 

·     Launched the Simply Hygena big ticket range and own brand takeaway furniture, extended plant ranges in store and online, and offered more premium garden furniture options.

·     Achieved digital sales growth of 43% in the first half of FY16, with digital sales participation increasing to c.10% of total sales, up from c.7%.

 

Homebase has grown its benchmark operating profit over the three years to 28 February 2015, operating through challenging macroeconomic and competitive conditions. These market challenges have included and continue to include an excess of retail space, the rise of a generation less skilled in DIY projects, and the growth of non-traditional digital and multi-channel competitors and category specialists.

 

In the 26 weeks ended 29 August 2015, Homebase generated revenues of £816.4m, and benchmark operating profit of £34.3m. The business employed an average of c.15,000 employees over the 26-week period. As at 29 August 2015, gross assets of Homebase were £880.4m.

 

5.  Financial Effects of the Transaction and Ongoing Dividend Policy

 

Financial Effects of the Transaction

The Transaction will significantly improve the Retained Group's overall financial position. This is illustrated as follows based upon the Group's actual results for the financial year ended 28 February 2015:

 

 

 

FY15

Actual

 

Transaction Impact

 

FY15

Pro Forma

Cash

£309m

 

c.£15m

 

c.£324m

Loan Book

£580m

 

-

 

£580m

Balance Sheet position

£889m

 

c.£15m

 

c.£904m

Gross leases

(£2,342m)

 

£1,425m

 

(£917m)

Total financial position

(£1,453m)

 

c.£1,440m

 

c.(£13m)

 

The Transaction will have the following estimated impacts on the Retained Group's future profit & loss account:

·     From FY17 the Retained Group's benchmark profit before tax ("PBT") will be reduced due to the sale of the Homebase business, which reported benchmark operating profit of £19.8m in FY15

·     A Transitional Services Agreement ("TSA") will be implemented to transition services provided to Homebase by the Retained Group

o  The Retained Group will continue to charge Homebase, under its new ownership, for the provision of services by the Retained Group's shared functions, such as large item home delivery, call centres and information technology. During FY16, the current financial year, the Group will have charged Homebase c.£70m in providing these services.

Under the TSA, the Retained Group will continue to provide these services for a range of periods of time not likely to exceed 18 months.

As the components of the TSA expire, the Retained Group will undertake a cost reduction programme, to eliminate as much as possible, the costs of any excess capacity remaining after Homebase no longer requires certain services from the Retained Group. 

Post this cost reduction programme we estimate that approximately £10m of overhead costs from providing services under the TSA would be reabsorbed by the Retained Group, assuming the costs cannot be utilised through internal growth or otherwise.

·     Over a period of approximately 18 months, Wesfarmers is likely to require the removal of the Argos digital concessions from Homebase stores, which, in the absence of alternative locations, would result in an anticipated reduction in Argos' benchmark operating profit of c.£10m.

 

Other than the loss of Homebase's operating profit, the Retained Group's benchmark PBT is unlikely to be adversely impacted in FY17 due to a combination of income received in respect of the provision of TSA services, together with the phased exit of the Argos digital concessions from Homebase. However, in the event that the Retained Group is unable to absorb surplus overhead capacity after the expiration of the TSA services, through growth or third party utilisation, or the Retained Group is unable to replace Argos concessions currently in Homebase stores with alternative locations, the Retained Group could incur an adverse benchmark PBT impact of c.£10m in FY18 increasing to c.£20m from FY19 onward. The Retained Group will look for opportunities over time to mitigate any negative impacts.

 

In addition to cash related transaction, separation, and restructuring costs of approximately £75m, it is expected that there will also be a non-cash write-off of approximately £50m, principally related to a loss on the sale of the Homebase business, together with the write down of certain other assets.

 

A break fee of £3.4m will be payable to Wesfarmers if the Transaction is prevented from completing in certain circumstances, including as a consequence of an alternative transaction for the sale of Homebase, or a takeover offer for Home Retail Group becomes effective or the modification or withdrawal of the recommendation of the Home Retail Group directors.

 

Ongoing Dividend Policy

Following completion, the Retained Group expects to adopt a similar approach to dividends as it maintains currently, after adjusting for the lower level of profit. Further details will be set out in the circular to shareholders.

 

6.  Use of Proceeds

The cash proceeds of £340m from the proposed Transaction are intended to be distributed approximately as follows:

 

Proceeds

£340m

Transaction, separation and restructuring costs

c.(£75m)

Contribution to the Group's Defined Benefit Pension Scheme

c.(£50m)

Intention to return to shareholders

c.(£200m)

Proceeds retained

c.£15m

 

7.  Approvals and Expected Timetable

The agreement for the sale of Homebase is subject, amongst other things, to approval by the syndicate of banks that provide the Group's revolving credit facility of £250m and the Group's shareholders. Argos will consult with employee representatives on relevant proposals (as and when developed) as required by law.

 

A circular containing further details of the proposed Transaction, the proposed return of capital and containing the notice convening a general meeting will be sent to Home Retail Group shareholders as soon as practicable. Completion of the proposed Transaction is expected to occur during the first quarter of the 2016 calendar year.

 

ENDS

 

Disclosure requirements of the City Code on Takeovers and Mergers (the "Code")

Following the announcement made on 5 January 2016 by J Sainsbury plc, Home Retail Group is in an Offer Period as defined by the Code.

 

Under Rule 8.3(a) of the Code, any person who is interested in 1% or more of any class of relevant securities of an offeree company or of any securities exchange offeror (being any offeror other than an offeror in respect of which it has been announced that its offer is, or is likely to be, solely in cash) must make an Opening Position Disclosure following the commencement of the offer period and, if later, following the announcement in which any securities exchange offeror is first identified. An Opening Position Disclosure must contain details of the person's interests and short positions in, and rights to subscribe for, any relevant securities of each of (i) the offeree company and (ii) any securities exchange offeror(s). An Opening Position Disclosure by a person to whom Rule 8.3(a) applies must be made by no later than 3.30 pm (London time) on the 10th business day following the commencement of the offer period and, if appropriate, by no later than 3.30 pm (London time) on the 10th business day following the announcement in which any securities exchange offeror is first identified. Relevant persons who deal in the relevant securities of the offeree company or of a securities exchange offeror prior to the deadline for making an Opening Position Disclosure must instead make a Dealing Disclosure.

 

Under Rule 8.3(b) of the Code, any person who is, or becomes, interested in 1% or more of any class of relevant securities of the offeree company or of any securities exchange offeror must make a Dealing Disclosure if the person deals in any relevant securities of the offeree company or of any securities exchange offeror. A Dealing Disclosure must contain details of the dealing concerned and of the person's interests and short positions in, and rights to subscribe for, any relevant securities of each of (i) the offeree company and (ii) any securities exchange offeror, save to the extent that these details have previously been disclosed under Rule 8. A Dealing Disclosure by a person to whom Rule 8.3(b) applies must be made by no later than 3.30 pm (London time) on the business day following the date of the relevant dealing.

 

If two or more persons act together pursuant to an agreement or understanding, whether formal or informal, to acquire or control an interest in relevant securities of an offeree company or a securities exchange offeror, they will be deemed to be a single person for the purpose of Rule 8.3.

 

Opening Position Disclosures must also be made by the offeree company and by any offeror and Dealing Disclosures must also be made by the offeree company, by any offeror and by any persons acting in concert with any of them (see Rules 8.1, 8.2 and 8.4).

 

Details of the offeree and offeror companies in respect of whose relevant securities Opening Position Disclosures and Dealing Disclosures must be made, can be found in the Disclosure Table on the Panel's website at www.thetakeoverpanel.org.uk, including details of the number of relevant securities in issue, when the offer period commenced and when any offeror was first identified. You should contact the Panel's Market Surveillance Unit on +44 (0)20 7638 0129 if you are in any doubt as to whether you are required to make an Opening Position Disclosure or a Dealing Disclosure.

 

Rule 26.1 disclosure

A copy of this announcement will be available on the Company's website at www.homeretailgroup.com/investor-centre by no later than 12 noon (London) time on 19 January 2016.

 

The content of the website referred to in this announcement is not incorporated into and does not form part of this announcement.

 

Further information

This announcement does not constitute an offer to sell or issue or the solicitation of an offer to buy or acquire securities of the Company or any of its affiliates in any jurisdiction or an inducement to enter into investment activity.

 

This announcement contains statements about Home Retail Group that are or may be forward looking statements. All statements other than statements of historical facts included in this announcement may be forward looking statements. Without limitation, any statements preceded or followed by or that include the words "targets", "plans", "believes", "expects", "aims", "intends", "will", "may", "anticipates", "estimates", "projects" or words or terms of similar substance or the negative thereof, are forward looking statements. Forward looking statements include statements relating to the following: (i) future capital expenditures, expenses, revenues, earnings, synergies, economic performance, indebtedness, financial condition, dividend policy, losses and future prospects; (ii) business and management strategies and the expansion and growth of Home Retail Group's operations and potential synergies resulting from the Transaction; and (iii) the effects of government regulation on Home Retail Group's business.

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
STRLIFSRLVITLIR
Close


London Stock Exchange plc is not responsible for and does not check content on this Website. Website users are responsible for checking content. Any news item (including any prospectus) which is addressed solely to the persons and countries specified therein should not be relied upon other than by such persons and/or outside the specified countries. Terms and conditions, including restrictions on use and distribution apply.

 


Proposed sale of Homebase - RNS