Hamish Rutherford: Pick 'n' mix for Woolies

Published on Monday 18 August 2008 21:14

WITH Icelandic sharks circling, it looks as if Steven Johnson, the "strong new chief executive" as Woolworths call him, is well on the way to earning millions of free shares.

Woolworths, the huge but virtually profit-free high street icon, revealed over the weekend that Malcolm Walker, the founder and head of the Iceland frozen food chain, wanted its 815-store retail operations, in a deal backed by Icelandic investor Baugur.

Despite firmly rejecting the offer, which would have left it with its full pension deficit, Woolies shares opened around 20 per cent higher yesterday, on relief from investors that anyone was even interested. Shares eventually settled to close up 11 per cent.

Even though he will not get his feet under the desk for another fortnight, Johnson, lured to the job by the prospect of millions of free shares if he can triple Woolworths' share price over the next three years, is well on the way already. It is a sign investors want a deal done.

Woolworths said it had rejected the bid from Baugur, claiming the offer undervalued the retail assets and would leave it saddled with its pension deficit, which it said was "unacceptable". It is believed the offer was less than the group's almost 50 million pension black hole.

But don't expect the fun to stop just yet. A low-ball approach – which the Baugur interest appears to have been – would leave the slimmed-down business with an unacceptable debt pile.

But it was clear yesterday that the market was not jumping for joy with its decision not to even engage in talks, meaning speculation will bubble on as Johnson attempts to knock the business into shape.

Freddie George, a retail analyst at Seymour Pierce, predicted shareholders would put "severe" pressure on the board of directors to seek an auction of the retail operations.

Its high street stores, the only thing the company is known for, are about as close to a sacred cow as one could imagine in British business. Selling them would appear to be akin to Woolworths deciding not to stock pick 'n' mix.

But a sale could prove to be a wise decision. Analysts have said for some time splitting the high street operation from the group's other businesses could be one way – possibly the only way – to create value from the business.

Beside its retail business, which despite public affection, has been in decline for years, Woolworths has a less well-known books and music wholesale business – Euk – and a joint venture with the BBC to distribute DVDs of some of its shows, 2entertain.

There have been claims that these other businesses could be worth at least 200m. While the figure is hardly remarkable, it is double the market capitalisation of Woolworths before the Icelandic interest was revealed.

Clearly that business cannot handle the group's net debt of around 125m, but shareholders will be hoping the Iceland approach was just an opening shot.

After years of watching former head Trevor Bish-Jones try but fail to revive its fortunes, shareholders are unlikely to be sentimental about giving new man Johnson time to make his mark.

With the potential to make millions from the sale, and the difficulty of turning Woolworths' retail business around, he may share shareholder's feelings.

MARIUS Kloppers' comments about the state of the mining sector are another sign of an industry where internal valuations are well above those of the market. Despite commodity prices falling and warnings that the economy is slowing down sharply, Kloppers, the head of the world's largest mining company, BHP Billiton, remained bullish as he unveiled more record results, increasing the dividend by half and telling investors to trust him on the company's 66 billion bid for rival Rio Tinto.

Commodity prices are notoriously fickle things – take the fluctuations in the price of oil in recent months as evidence of that – and every time BHP has spoken about its desire to take control of Rio, it has urged the market to look at the long-term trends.

Fair enough, but the same conditions which are hurting the rest of the economy, such as fuel costs and inflation, are clearly hitting BHP.

A sign, surely, of an overheating sector and hardly the time to risk a deal of this size when the state of the economy of the growth engine of the company, namely China, remains unclear.