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Why the share price of Wesfarmers Ltd (ASX: WES) is rallying to an 18-month high today

Photo credit: AS 1979

News that Wesfarmers Ltd (ASX: WES) will sell its UK home improvement business for next to nothing has sent its share price jumping to a one-and-a-half year high this afternoon.

It’s no easy feat to get such a bullish reaction from the market while booking a big loss on the sale of a business, but luck was on Wesfarmers chief executive Rob Scott’s side.

The stock jumped 0.8% to $45.45 on the news while the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) sank 0.1% into the red in afternoon trade. Not even its better liked rival Woolworths Group Ltd (ASX: WOW) could do better with its shares slipping 0.5% to $28.88.

But the outperformance of Wesfarmers is buoyed by shareholder elation – it’s based more on relief. The fear was that Bunnings UK would end up costing shareholders billions in losses, which is more than Woolworths’ disastrous tangle with its DIY monster, Masters.

So being able to walk away from Bunnings UK and Ireland (BUKI) without dropping its pants is a big win, particularly since paying off the leases on the stores alone is estimated by Macquarie Group Ltd (ASX: MQG) at around $1.8 billion – and that’s before redundancies and other associated costs.

What’s more, there may even be a slim chance of a payday for Wesfarmers as Hilco Capital, the white knight buyer of the English thorn-in-the-side of Wesfarmers, is promising to give the retreating Aussies a 20% share of any future sale of the business.

Wesfarmers would not say how much Hilco is paying, except that it’s a “nominal sum” and that the conglomerate will book a £200 million to £230 million loss on its full year results.

Wesfarmers paid £340 million for the Homebase business in the UK two years ago, which allowed it to roll out its Bunnings stores in that market, so even if Hilco paid £1 for Homebase and all its liabilities (which I suspect it did), that still leaves Wesfarmers $2 billion and £1 richer as far as I am concerned.

It’s also worth noting that Hilco, a US financial services firm, salvaged the bankrupt HMV music chain five years ago and it may actually be able to extract value from Homebase… eventually.

This is a great outcome for shareholders as I do not believe management had the ability to turnaround that division given the string of bad judgement calls it made at the start when laying the foundations of BUKI.

The sad episode should also serve as an important case study for Metcash Limited (ASX: MTS), just in case it was thinking of taking its DIY division overseas.

So, the next time you feel embarrassed about our cricket team being sent packing with their tail between their legs by the British, spare a thought for Wesfarmers.

At least now, the stock is looking much more appealing.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. 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 Scott Phillips.

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