Woolworths (WOW) has unveiled plans to consolidate its drinks and hospitality businesses into a single entity, Endeavour Group. This strategic move precedes a potential demerger in CY20, aiming to streamline operations and enhance focus within Woolworths' core Food business.

Endeavour Group Restructure

Overview

Endeavour Group will integrate Woolworths' drinks division, comprising retail brands like Dan Murphy’s and BWS, with its hospitality arm, ALH Group, which manages a portfolio of pubs, bars, and hotels. Following consolidation, Woolworths intends to pursue a demerger or explore other value-enhancing alternatives.

Timeline

The restructuring is slated for the second half of CY19, with the demerger or sale anticipated in CY20.

Ownership Structure

Upon consolidation, Woolworths will hold an 85.4% stake in Endeavour Group, while the Bruce Mathieson Group (BMG) will own the remaining 14.6%. Woolworths plans to retain a minority shareholding in Endeavour Group post-demerger.

Focusing on Food Business

Strategic Rationale

The separation of Endeavour Group will enable Woolworths to sharpen its focus on its core Food business. This move is strategic amid rising competition, escalating costs, and evolving consumer preferences, with digital platforms gaining prominence.

Growth Opportunities

With a more streamlined structure, Endeavour Group can pursue growth initiatives such as accelerating store renovations and expanding its store footprint. Capital investment in Endeavour Group was previously limited due to higher returns in the Food business.

Potential Gambling Exit

While Woolworths maintains it isn't distancing itself from the gambling industry, the Endeavour Group separation could facilitate a potential exit from gambling activities in the future.

Valuation and Investment Outlook

Endeavour Group Valuation

As a standalone entity, Endeavour Group is valued at an enterprise value of A$10.5-11.5 billion, based on a 14-15x FY20F EV/EBIT multiple. This valuation aligns with industry peers such as Coles Group (COL) and Wesfarmers (WES).

Investment Insights

No changes are made to earnings forecasts, but adjustments are made for recent off-market buybacks. Despite a robust balance sheet and positive sales momentum, Woolworths' fully valued status, trading at 23.3x FY20F PE ratio and 3.2% yield, prompts a hold rating.

In conclusion, Woolworths' strategic restructure underscores its commitment to optimizing its business portfolio and enhancing shareholder value amidst a dynamic market landscape.

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Woolworths (WOW) has announced its intention to combine Endeavour Drinks and ALH Group (to be called Endeavour Group) ahead of a possible demerger in CY20.
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