UK exposure could haunt Wesfarmers Ltd

Credit: lee bristol

The so-called ‘Brexit’ has certainly caused some jumpiness amongst investors across global financial markets and for the most part it is arguably justified.

The volatility is for a number of reasons including the cut to the United Kingdom’s (UK) credit rating which could increase borrowing costs, the potential increase in costs for UK firms to access European markets, and the drop in value of the British pound (GBP) against major trading currencies such at the US dollar.

The potential negative consequences from the outcome of the UK’s referendum are thus rightly being reflected in lower share prices for many UK-exposed companies.

Amongst those most affected on the ASX are CYBG PLC CDI 1:1 (ASX: CYB) and Henderson Group plc (ASX: HGG), which have both fallen by over 20% in the past week.

Terrible timing?

While Wesfarmers Ltd (ASX: WES) certainly doesn’t have the level of exposure to the UK as CYBG or Henderson Group, it does have more exposure to the UK than it did at the beginning of calendar year 2016.

Back on 14 January 2016, Wesfarmers announced that it had offered to acquire UK retailer Homebase for £340 million in cash, after discussions and due diligence work commenced in October 2015.

Following a shareholder vote by Home Retail Group – the owner of Homebase – Wesfarmers advised the market that it expected to complete the acquisition at approximately the end of February. As at February 25, the acquisition in Australian dollars would have cost about $661 million at then exchange rates.

Fast forward to today and not only is it likely that the asking price for Homebase would be lower, but even at the agreed price of £340 million the fall in value of the GBP alone would have made the acquisition significantly cheaper at just $610 million – a saving of about $50 million!

Of course, hindsight is a wonderful thing and Wesfarmers’ management doesn’t have the luxury of a crystal ball.

The reality is that while Homebase may have been snapped up at a lower price had a transaction occurred a few months later, the ultimate outcome from Wesfarmers’ decision to launch its Bunnings hardware business into the UK will not hinge on the price it has paid for Homebase, but rather how it executes its strategy.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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