It doesn’t matter whether it is Warren Buffett, one of the world’s richest people and the CEO of conglomerate Berkshire Hathaway Inc. (NYSE: BRK.A) which has a proven track record of creating shareholder value, or CEO Richard Goyder at Australia’s largest conglomerate Wesfarmers Ltd (ASX: WES), almost without fail, sell-side analysts love to hate the conglomerate structure.
For the most part it would seem that analysts at major broking houses prefer to be able to easily compartmentalise a company. A company which fits neatly into a group with peers makes comparisons and relative valuations easier; whereas a company such as Wesfarmers is a ‘headache’ for analysts – is it a coal miner, a retailer, a fertiliser supplier?
Recent strategic moves by Wesfarmers which have led to certain business units being sold off including gas assets, insurance broking assets and the $1.8 billion insurance underwriting sale to Insurance Australia Group Limited (ASX: IAG) have resulted in the conglomerate’s focus narrowing and the retailing businesses increasing their dominance within the group. The asset sales have also boosted Wesfarmers’ cash holding and balance sheet power and a large acquisition is considered likely.
Last week The Australian Financial Review (AFR) reported murmurs that Wesfarmers was running the ruler over healthcare operator Healthscope, which competes with Ramsay Health Care Limited (ASX: RHC) in the private hospital industry and Sonic Healthcare Limited (ASX: SHL) and Primary Health Care Limited (ASX: PRY) in the pathology and medical centre industries. According to the AFR, analysts – predictably – questioned the merits of Wesfarmers acquiring Healthscope.
As predictable as it is that sell-side analysts would be against a move into a non-aligned industry, investors and Wesfarmers’ shareholders have reason to be positive of such a move – should it eventuate. Goyder and his team have a disciplined approach to acquisitions with a focus on not overpaying, generating adequate returns on invested capital and creating shareholder value. Given the long-term tailwind of healthcare, a purchase of such a large business at the right price could be a fantastic addition to the Wesfarmers’ conglomerate.