Goyder profits from problem child

It's a fair bet that when chief executive Richard Goyder received the first of several unsolicited approaches from insurance companies looking to buy Wesfarmers' insurance underwriting business, he figured his ship had come in.
By · 17 Dec 2013
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17 Dec 2013
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It's a fair bet that when chief executive Richard Goyder received the first of several unsolicited approaches from insurance companies looking to buy Wesfarmers' insurance underwriting business, he figured his ship had come in.

It has taken most of the year but Goyder has stage-managed the largest ever Wesfarmers asset sale, at $1.845 billion, on which the company will book a very tidy pre-tax profit of up to $750 million.

After 8 years at the helm most other chief executives would make this their swansong. But Goyder can't go - he still has to prove that Wesfarmers' biggest acquisition, Coles, delivers the returns the shareholders are promised when they invest in Wesfarmers.

The sale of insurance to IAG announced yesterday, however, is a deal reminiscent of vintage Wesfarmers - a company that traditionally deals in businesses using industry agnostic commercial discipline.

Wesfarmers may not have been actively looking for a buyer for insurance but the interested parties would have been given a warm reception.

Goyder readily admits this business has been one of the Western Australian conglomerate's problem children for years. And he may be right that it wasn't the fault of the management but the nature of the industry. With the exception of the 2013 year, in which the insurance underwriting group experienced a massive turnaround in fortunes after five years of underperformance.

The sale price of $1.845 billion represents a multiple of earnings before interest and tax of 13.6 times those 2013 earnings.

This might seem relatively conservative but the sale price looks much more generous if the previous years' performances from the insurance division are a guide.

It's a volatile and risky industry even for native insurance companies. And Wesfarmers' mantra is all about the certainty of its returns.

The buyer, IAG, plans to extract synergies, improve underwriting and grab some market share, making the deal earnings accretive after two years.

All of this works only if the Australian Competition and Consumer Commission approves the acquisition which, despite IAG's stated supreme confidence, must still contain plenty of question marks.

There will certainly be a thorough review by the regulator, which will take the finalisation of the deal well into 2014.

Goyder's in-house merger and acquisitions team might have something on the boil but, given asset prices seem to be on the rise, there is a better-than-even chance that almost $1.9 billion will be landing in Wesfarmers' bank account next year.

The company has just completed a capital return of $579 million and plenty of shareholders will be hoping for another next year.

Such financial treats can provide diversion from Goyder's main game, which is overseeing one of Australian history's great business turnarounds.

It was an easy inflection point to miss, but 2013 saw the retail assets come very close to returning cost of capital. And if they continue on the same trajectory they will probably exceed cost of capital this year.

All established businesses should be able to do this, so it shouldn't be a boast. It's just that Coles Group was in such a neglected state when Wesfarmers acquired it - and the global financial crisis blew up the debt funding structure - that Wesfarmers has been scrambling to catch up since.

The five-year Coles acquisition anniversary ticked over this year and, rather than being able to cross the finishing line, Goyder had to set up new targets for the retail business. A new five-year plan - a new and harder phase of growth.

Another Coles reinvention, despite the fact it has caught up to Woolworths in so many important ways.

Kmart has been a somewhat unexpected positive performance surprise, Officeworks has been solid and Bunnings has gone from strength to strength.

But investors continue to ask why discount department store chain Target continues to earn its position in the Wesfarmers portfolio of retail assets.

Goyder steadfastly continues to argue that Target has a future with better returns despite a couple of attempts to restructure it under different managements.

It is an asset, like Dick Smith, which may thrive under more focused ownership - away from having to slot into a brand position next to its sister company Kmart.

It is also the kind of asset that private equity players may be inclined to pick up - but on the cheap.

But selling to low-ball opportunistic buyers is not really in the Wesfarmers DNA. The West Australian group sees itself as the buy-low turnaround agent.

The feeling at Wesfarmers is that Goyder will roll the Target dice one more time. Indeed the last thing he wants is to be blushing like Woolworths' Grant O'Brien, who sold Dick Smith poorly to a group of retail entrepreneurs who bagged a fourfold profit.
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