On Wednesday, Wesfarmers Ltd (ASX: WES), a Perth-based conglomerate, announced it had canned the proposed initial public offering (IPO) of its Officeworks business. It said that "at this point in time (it) would not realise appropriate value and would not be in the best interests of its shareholders."
The group first announced the prospect of offloading Officeworks after commencing a strategic review of the business in February. After acquiring the stationary and office supplies company in 2007, Wesfarmers more than doubled its earnings and improved its return on capital from 5.7% in 2009 to 13.9% in the current period.
At the time, Wesfarmers stated that Officeworks was still well positioned for future growth, and that it was in a strong competitive position. However, it also stated that "the business will be retained if divestment options do not meet Wesfarmers' valuation hurdles."
In light of recent trading conditions, Wesfarmers has decided to exercise its option to retain Officeworks.
3 reasons why the Officeworks IPO is back on the shelf
The retail environment as a whole has been volatile of late. Investors within the sector have watched in dismay as some of their favourite shares have deteriorated in value since Wesfarmers' initial announcement (on 14 February), with major retailers such as JB Hi-Fi Limited (ASX: JBH) and Harvey Norman Holdings Limited (ASX: HVN) down 20.9% and 24.2% in that time, respectively.
Premier Investments Limited (ASX: PMV), which owns the popular Smiggles stationary brand (amongst others), has also shed 8.6% while Wesfarmers' own share price has gained a mere 2.4% [although that has outpaced the 0.4% gain recorded by the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO)].
Thus, given the rather meagre performance of the retail industry so far in 2017, it's hardly surprising that Wesfarmers would shelve its IPO plans for Officeworks. If investors are losing confidence in the retail sector itself, it's less likely they'd be willing to pay up for Officeworks' shares, limiting the proceeds to be taken by Wesfarmers.
A second reason behind the change of plans could simply relate to the general perception that often surrounds IPOs. Investors do their best to buy low and sell high. Wesfarmers has done a terrific job of turning the Officeworks business around but investors were sure to be asking the question, why are Wesfarmers selling now? (That is, whether or not Officeworks has hit its peak). Again, that perception could well have limited the amount of money to be raised by Wesfarmers, particularly in light of the low consumer confidence recently.
A third reason why the Officeworks IPO may have been cancelled (or at least delayed) has been a topic of much debate. U.S. ecommerce juggernaut Amazon.com, Inc. (NASDAQ:AMZN) has confirmed it will expand its operations in Australia, putting the revenues and margins of retail businesses around the country at risk (just as it has done in its home country). It is unclear how long it will take to do so on a meaningful scale, but it is clear that the threat is very real.
Foolish Takeaway
The retail sector is facing significant uncertainty right now. Although investors shouldn't consider the industry completely off-limits (there could well be opportunities if prices continue to fall), due diligence and caution should certainly be exercised.
