Gambling really is becoming mainstream when you have Australia’s most profitable retailer attempting to buy our biggest poker machine operator in a sharemarket raid.
So it’s official, Woolworths and Bruce Mathieson want to be the grog and pokie kings of Australia, probably at a cost that will exceed $1 billion.
The oddly-named company Bruandwo Pty Ltd revealed itself late on Friday as the proud owners of “approximately”16% in Australian Leisure and Hospitality Group Ltd, the country’s largest hotels group with 133 outlets, and the biggest owner of poker machines.
The joint venture company’s address is in swanky South Yarra, a nice part of Melbourne to base a bid vehicle that’s modestly named after the two partners (bru and wo). That would tend to confirm that Bruce wants the pokies and no doubt some of the pubs, and Woolies wants as many of the pubs in Queensland as it can get its hands on, and won’t say ‘no’ though if there is a chance to run the liquor businesses in all of them.
Roger and Bruce said in the statement that they want to start talks with the ALH management and board, but did not rule out a takeover. Strangely, the Weekend Fin revealed that Bruce did not reveal his raid when he was lunching with ALH CEO Geoff Rankin and others at a farewell lunch for retired Foster’s CEO Ted Kunkel.
The takeover talk lit a fire under an already volatile ALH share price, pushing it to a close of $2.97, well above the nominal $2.50 price underwritten by Macquarie Bank for institutions ($2.40 a share for small investors and $2 a share for Macquarie and friends) in that now controversial demeger and float out of Foster’s last year.
Bruce and Roger said they contacted ALH late on Friday to inform them of the shareholding and “to open a dialogue in relation to whether they would be interested in exploring alternatives that may benefit both parties.
“Mr Corbett and Mr Mathieson noted that this may ultimately result in a takeover for ALH.”
For that special group of five institutions that ended up with a swag of shares at $2 each and are handsomely in front, this will add to the machinations of Woolies, Mathieson and their investment bank, UBS. Deutsche Bank so far has been confirmed as a recent seller of ALH, putting out a change in substantial shareholding notice that revealed the sale of almost four million shares to a new figuire of 8.26%, or 29.10 million shares. Macquarie Bank was said to have held around 10 per cent in a notice made to the ASX in May.
Foster’s meanwhile owns 35.25 million ALH shares under escrow to November of this year but can sell those in the event of another party obtaining 50% or more of ALH’s issued capital. That gives them a gross payment of $105 million for that stake should Roger and Bruce’s bid eventuate and succeed.
Bruce and Roger already have form in the pubs business in Queensland. The MGW Hotels group is the vehicle and Mathieson 30%, his long time associate, Andrew Griffith has a stake, along with Woolworths. The venture owns 50% of Woolies liquor business in Queensland and spent $200 million on licensed liquor outlets in Queensland last year.
Woolies says the sales from the joint venture are not taken into its accounts. They totalled $148 million last financial year but it is all off balance sheet.
To succeed, Woolies and Mathieson will have to bid more than $3 a share (although they will claim that that is an overheated price and a more accurate figure would be south of that). But that will only be special interest pleading.
What’s clear is that once again a company flogging an asset through a market float, in controversial circumstances, has missed out on significant value. The same comment can be made about the way the AMP sold off its Stanbroke cattle business to a joint venture, and then a member of that group turned around and paid around $180 million more for the business.
In the case of ALH, Woolies and Mathieson have so far pushed prices up by around 50 cents for most and a juicy $1 a share for Macquarie Bank and the four other lucky institutions.
Even though Foster’s have had investment banker turned Challenger CEO Mike Tilley take a quiet look at the controversial sale process and the result, there is nothing they can do about it. So they are stuck, no doubt with Ted Kunkel out the door from July 2, glad to be rid of the business and the whole sorry mess which has reflected badly on a lot of people.
But there’s no doubting Roger Corbett’s ability to go for the strategic deal, or to think big. He’s always wanted to be a major player in lots of areas of retailing other than supermarkets and discount stores. Now he’s got petrol (in the top four retailers), liquor (in the top two) and still wants pharmacies and drugs.
But it’s a long way from the core business of supermarkets, which remain the cash and earnings powerhouse of the group. Sales growth there is slowing and there are now growing doubts that the rich gains from the Project Refresh revamp might be losing momentum and the ability to drive earnings.
Woolies reveals its sales figures later this month for the fourth quarter and the financial year and annual earnings on August 23. There’s a lot riding on signs of a resumption of strong growth. If there’s no sign, ALH will prove to be a diversion for disappointed investors.
There are some major implications for Woolies if it moves further into the poker machine business, although it would appear Bruce Mathieson would be is on board to deal with them. It will certainly still give ethical investors greater pause for concern.
Even without the pokies, Roger Corbett, James Strong and the team at Woolworths have decided to go further down the ‘sin’ route in gingering up its slowing performance. The choice of partners is also controversial because the pubs czar Bruce Mathieson was the chap who Crikey dobbed in to 4 Corners for helping fix Jeff Kennett up with 50,000 shares in Guangdong for his wife Felicity. The last time this former Port Melbourne tough guy teamed up with a major corporate it was with Bond Corporation to pick up the Austotel portfolio centred around Sydney.
ALH has 133 pubs round Australia, but is the leading liquor group in Queensland, where Woolies already operates a number of hotels with local partners and has been looking to build its market share. That’s to get around the difficulty in securing new or old liquor licences.
No matter what spin Roger, James and the Woolies board puts on the deal, if it happens, there is a growing ‘sin’ complexion to the retailer. Selling grog is okay so far as ethical funds are concerned, but having an interest or a relationship with the Australia’s biggest owner of poker machines is something else again.
If Woolies is the pea for ALH then Roger Corbett will have to do a deal with the pokies side. As a committed Christian who attends an Anglican church regularly, that will no doubt be of some trouble to him. Then again, business is business and former Foster’s chairman John Ralph approved the building of this pokies empire despite attending Catholic mass each week.
Just goes to show how mainstream gambling has become in Australian. Even Goldman Sachs JB Were is advising ALH on its defence when in days gone by, the Presbyterians in charge at JB Were refused to have anything to do with gambling companies.