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Wesfarmers to sell Homebase chain, book up to £230M loss

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Wesfarmers to sell Homebase chain, book up to £230M loss

Australian conglomerate Wesfarmers Ltd. said May 25 that it agreed to sell its struggling Homebase home improvement chain in the U.K. and Ireland, taking a loss of up to £230 million in the deal.

The buyer is a company associated with private equity firm Hilco Capital LP, which will pay a "nominal amount" for all Homebase assets including its brand, store network, freehold property, property leases and inventory, according to a Wesfarmers statement.

The agreement comes shortly after a report that Hilco, the owner of entertainment retailer HMV Group, was one of three investment firms to make offers for the chain. News first emerged in March that Wesfarmers had started approaching potential buyers.

Wesfarmers expects to record a loss on disposal of between £200 million and £230 million in the group's 2018 full-year financial results. The company spent £340 million to buy Homebase in 2016, and had been in the process of converting stores to its Bunnings Warehouse DIY retail format within its Bunnings U.K. and Ireland unit, also called BUKI.

The 24 pilot Bunnings stores operating in the U.K. and Ireland will revert back to the Homebase brand upon completion of the deal, which is expected to take place by June 30.

Under the deal agreement, Wesfarmers will participate in a value share mechanism entitling the company to 20% of any equity distributions from Homebase, with no time limitations. That allows Wesfarmers to get proceeds from any divestment of the chain in the long term.

Damian McGloughlin, who was named managing director of BUKI in February, and "a number of the most senior team members" will remain with the business, Wesfarmers Managing Director Rob Scott said during a May 25 conference call. "There might be a few team members who need to be relocated back to Australia, and we will work through that in the coming months," he added.

There will be remuneration implications from the impairment and losses for the Wesfarmers management team, which Scott expected to disclose to the market in due course.

Wesfarmers in February flagged A$1.26 billion worth of writedowns and impairment charges, mostly against the Homebase business, and said it had started to review options for the loss-making chain. In April, BUKI recorded a 13.5% drop in total sales in local currency terms to £211 million for the fiscal third quarter, while store-on-store sales fell 15.4%.

Scott noted during the call that "dramatic deterioration in the U.K. macro and retail environment" following the Homebase acquisition had also hit BUKI's performance.

"With further restructuring and capital investment, Homebase is capable of returning to profitability," Scott said. "However, the materiality of the opportunity and risks associated with turnaround are not considered to justify the additional capital and management attention required from Bunnings and Wesfarmers."

A divestment under the agreed terms is in the best interests of Wesfarmers' shareholders, he added. "It clearly strengthens our balance sheet once we've completed this transaction and gives us more financial flexibility."

In regards to what Wesfarmers learned from its overseas investment, Scott said: "Probably the greatest learning for us has been the importance of having very strong local management on the ground in the business." The executive also said he still believed there would be future opportunities for the company to make more investments.

At midday in Sydney, Wesfarmers shares were up 41 cents, or 0.91%, at A$45.52.

As of May 24, US$1 was equivalent to A$1.32.