Well, no-one saw that coming.
Ever since Wesfarmers announced its intention to demerge Coles, investors have been speculating about what the investment conglomerate would do next.
Most — almost all — guesses centered around a few well known, if staid, industrial companies. Healthcare and utilities topped the list.
After all, this is the sensible, storied and generally conservative Wesfarmers we're talking about.
And then…
And then, this morning came the news that it had offered $1.5 billion to buy rare earths miner, Lynas.
If the name 'rare earths' isn't immediately familiar, you might know them better as 'mineral sands'. Rare earths is a sexier name, of course, and also misleading — they're not rare at all. Indeed, no less than the BBC calls them 'abundant'.
But I digress.
Wesfarmers is offering $2.25 per share — a nice not-so-little 45% premium to where the shares closed yesterday.
To say this is out of character for Wesfarmer is something of an understatement.
Oh sure, Wesfarmers has other mining interests, notably coal, but rare earths?
And Lynas? The company whose shares were down more than 90% from its 10-year highs? And 50% lower — before the bid– than its year-high share price? In an industry that is notably politically sensitive and often mines in countries that define the term 'sovereign risk'?
Yes, the very one. We're not in Kansas — or Perth — anymore, Toto.
This bid — if successful — will be reputation-altering for Wesfarmers.
If management gets it right, it'll show the company as one prepared to go anywhere in search of returns for shareholders — and with burnished investment credentials to boot.
If the acquisition proceeds, and goes badly, it'll be one of the starker examples of a company straying too far out of its wheelhouse.
Management knows that, of course, and would have thought long and hard about the ramifications of the deal. Having done that, and proceeding anyway, they deserve at least our respect for backing their judgement.
After all, you can look at a bombed-out share price two ways… either it's just desserts for a company that never deserved such a high price in the first place… or it's a golden opportunity for an acquirer who can look through the short term, and can see potential… and future profits.
I'll say this: they're braver than me.
I don't necessarily think they're wrong, but I'm also not convinced that rare earth mining is exactly inside their circle of competence. And in a world where commodities are known, well, commodities, taking a contrary view to the market is a gutsy call.
It's either brave or crazy-brave. Or a horrible mistake.
In context, of course, it represents less than 4% of Wesfarmers' current market capitalisation. So it won't make or break the company. At least not financially. But a generation of shareholders used to it making conservative investments will be looking at it askance this morning.
This is the company that promises, underwhelmingly, but reassuringly, "to provide a satisfactory return to our shareholders".
The business that is considered a defensive staple of conservative, low-risk portfolios.
Maybe Wesfarmers is responding to the prospects of a no-franking-refund world. Maybe it just thinks there's a contrarian play at the bottom of the cycle.
Or maybe this isn't your father's Wesfarmers any more.
The response this morning is telling: shares are down around 3.8% at the time of writing — coincidentally almost exactly the value of the Lynas bid.
The bid might not succeed, of course. And it could all be for naught. Or Wesfarmers shareholders could end up owning an asset worth much less than the company paid to buy it.
Without proven experience in the field, this strikes me as a bad decision. Wesfarmers isn't known for its competency in either mining in general or rare earths in particular.
Does it really know more than the market? Are the odds really on its side? The one thing going for it is that it's buying when no-one else is. If it's right, that's a wonderful time to buy. If it's wrong, it'll be the patsy.
Smart or silly? Time will tell.
