Why the Wesfarmers Ltd share price is rocketing today

Credit: lee bristol

What: The share price of Wesfarmers Ltd (ASX: WES) has leapt around 3% on Monday to $40.50 after the retailer announced that it had come to an agreement to acquire UK home improvement and garden retailer Homebase.

So What: The pop in the conglomerate’s share price highlights how positive investors must be on the announcement given it has come on a day when the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has continued to be sold off aggressively in response to significant falls on overseas stock markets.

As I reported here, Wesfarmers announced to the market last week that it was in talks to acquire Homebase.

Given the poor track record of large Australian-based companies to successfully chase growth through expansion overseas there was certainly good reason for investors to practice caution in assessing this announcement by Wesfarmers. Caution was even more warranted considering this will be Wesfarmers’ first attempt to expand into overseas markets (excluding New Zealand).

Now What: Today’s confirmation that the acquisition will proceed was accompanied by a presentation which provides investors with more colour around the deal and based on the jump in the share price, it has gone some way to alleviating investors’ concerns.

Here are some of the key points:

  • Acquisition price $705 million to be completed by end of March 2016
  • The acquisition of Homebase will provide Wesfarmers with a similar number of stores (265) to its current Bunnings network in Australia
  • Homebase’s earnings before interest and tax (EBIT) for the 12 months to 29 August 2015 were $52 million
  • The rationale for the purchase is attractive industry fundamentals and the “ability to improve existing Homebase performance in the short-term through operational improvement”

As Wesfarmers’ management noted, due to the early stage of the transformation activity planned for Homebase, management is not expecting any material effect on Wesfarmers’ earnings per share or return on equity in the near term. Rather benefits of the acquisition are expected to come in year three post acquisition.

Just as management is taking a long term view in terms of the potential shareholder benefits from this acquisition so too should investors in their valuation.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. 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.

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