Is Wesfarmers Ltd about to copy Slater & Gordon Limited’s mistake?

Photo credit: AS 1979

What: Shares in blue-chip conglomerate Wesfarmers Ltd (ASX: WES) have failed to buck the trend of a renewed sell-off in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) today, despite announcing a potential acquisition.

So What: According to Wesfarmers’ media release, the group, which owns leading retail chains including Coles, Bunnings and Officeworks, has made a conditional offer to acquire the UK’s second-largest home improvement and garden retailer Homebase for £340 million.

At current exchange rates, the purchase price equates to around $700 million, so it’s certainly a meaningful transaction – even for Wesfarmers which boasts a market capitalisation of about $44 billion.

For Australian investors it’s unlikely they know much about the Homebase business. According to Wesfarmers, the retailer has 265 stores and revenue of nearly €1.5 billion.

Not surprisingly, Wesfarmers believes the UK home improvement and garden market is an attractive and growing market.

Interestingly, Wesfarmers plans to reinvigorate the business by rebranding Homebase as Bunnings.

What now: An acquisition of Homebase would provide Wesfarmers with immediate scale on which to expand its Bunnings division into the UK, however, investors should approach with caution.

One of the stated strategic reasons for acquiring Homebase is that “the existing Homebase performance will be enhanced in the short-term through operational improvement”.

While Wesfarmers can rightly point to its success in improving the operations of an underperforming Coles when the company acquired it, there is no certainty that the same success will be forthcoming in the UK where possibly a different skillset will be required.

Nor can it be presumed that current Homebase management have been doing a poor job operationally and that Wesfarmers can come in and immediately do it better.

There is also a general reason to approach this potential acquisition with caution. History!

There is a long line of failed global expansion plans which have been undertaken by large Australian companies.

National Australia Bank Ltd.’s (ASX: NAB) disastrous business in the USA and its underperforming UK banks are one example which continues to stick in shareholders’ minds.

More recently, the thrashing given to legal services firm Slater & Gordon Limited (ASX: SGH) after questions arose about its arguably ill-timed expansion into the UK should act as a reminder that acquisitions and global expansion are not without their risks.

This could be the BEST investment you make all year!
Motley Fool Pro is now open to new members Our most comprehensive and innovative ASX investment service -- has reopened for a brief time, to accept new members. That means you've got the chance to follow along as one top investor puts $1,000,000 of The Motley Fool's own money to work...all in ASX stocks. But to get YOUR front-row seat, you must act NOW. (Please note: just 1,000 new member seats are available.) Click here to claim YOUR invite!

Motley Fool contributor Tim McArthur owns shares in Slater & Gordon Ltd. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.