According to analysts.
Bank of America Merril Lynch (BAML) believes Wesfarmers could face “heavy losses” in its acquisition of Homebase as the Brexit vote is likely to push the UK economy into a recession due to currency and political risk.
In a report released late last week, BAML analyst David Errington (pictured) said, “If Wesfarmers cuts its losses and eliminates any plans in the foreseeable future to grow Homebase, we believe the damage to shareholder returns can be isolated to the initial capital outlay (just under $700 million) and the capitalised value of the lease commitments (estimated to be around $2 billion).
“Wesfarmers has put forward a plan to spend up to $1 billion to refit, restructure and reposition the Homebase stores and customer offer over the next five years. If Wesfarmers continues its current plans, and commits the capital to Homebase, we believe the operating losses will increase, due to the restructuring, and the overall value erosion to shareholders will escalate.”
The report is based on the call by BAML’s economists which argues that the UK will fall into recession and Homebase’s earnings will quickly dissolve to negligible levels (i.e. be break-even at best).
“In our view, it will be many years before Homebase generates any or reliable profit and hence we believe the initial investment Wesfarmers made has a zero value,” Errington commented.
“If Wesfarmers elects to push on with its plans to spend $1 billion in restructuring the business, the capital lost to shareholders would grow up to $4 billion,” he added.
“The housing market is likely to suffer in this environment and we would expect the consumer discretionary market Homebase operates in to contract sharply,” he said.