Wesfarmers must renew its conglomerate licence

At a time when companies are under pressure to demerge and focus on their cores, investors have allowed Wesfarmers to remain a conglomerate. It needs to diversify very soon to stay that way.

Wesfarmers chief executive, Richard Goyder, talks about having a “conglomerate licence”.

He means that in an era of investors forcing companies to demerge and, like pilates devotees, to focus on their cores, Wesfarmers is being allowed by the market to remain a conglomerate.

This is a valuable licence to have, and Goyder and the Wesfarmers board don’t want to give it up. That’s why at a public event in Perth a week ago he reaffirmed his faith in the conglomerate model.

“The model and the internal processes we’ve got has ... held all of us and our stakeholders in good stead and it’s something I think we should preciously guard.”

That’s why Wesfarmers must soon make a significant acquisition, and the only thing that takeover definitely can’t be is a retailer.

Wesfarmers is almost completely a retailer now. The dramatic improvement in Coles and the decline of the coal business have meant that 82 per cent of its profit and roughly the same percentage of its assets are retail.

To “preciously guard” its conglomerate licence, Wesfarmers desperately needs to diversify again, preferably through a big acquisition -- at least $5 billion and preferably $10 billion -- and definitely not a retailer.

It’s an interesting position for a top 10 Australian company to find itself in.

Australia used to be well populated with big conglomerates; now Wesfarmers is the only one, having outlasted them all. It also has a remarkably stable management history.

Richard Goyder has been chief executive for nine years and is only the seventh in the company’s 100-year history.

Every CEO has been an internal appointment -- the company’s record for succession planning is second to none, and the next succession event will almost certainly be no exception: CFO Terry Bowen would have to die not to be the next Wesfarmers CEO, and the head of Bunnings, John Gillam, would be next in line if tragedy did befall the CFO.

Goyder does not want to be CEO who lost Wesfarmers’ conglomerate licence and leave his successor with a retailer.

There’s been speculation that he will bid for Ramsay Health Care, the nation’s largest hospital business, with a market capitalisation of $10 billion.

That would certainly reinforce its status as a conglomerate, but Ramsay is 34 per cent owned by the Paul Ramsay Foundation and it’s not a seller. The price required to prise that stake out of the foundation would too high.

Apart from that, the candidates in Australia are thin on the ground, and expensive.

So Richard Goyder has engaged the former head of Coles, Ian McLeod, to scour China looking for takeovers, which is nice work if you can get it, but it raises the question of what, exactly, Wesfarmers would bring to any target -- especially one that’s not a retailer, and especially a non-retailer in China.

What is Wesfarmers’ core business, really? I’d say governance and capital management.

That is, it brings to bear a system very similar to that of Warren Buffett, of putting high quality managers into businesses that it owns fully and letting them get on with it, within a well-oiled machine of capital allocation and governance.

That is the essence of Wesfarmers, set up by Trevor Eastwood in the 1980s and refined by Michael Chaney in the '90s. With his acquisition of Coles in 2007, Chaney’s successor Richard Goyder pushed the system to its limit -- successfully -- but also tilted the company dangerously towards a single focus.

If Ian McLeod really does find the next big acquisition in China, or anywhere overseas for that matter, Wesfarmers’ governance and capital systems will be stretched again, and the eighth CEO will have his job cut out.

But at least this great century-old company will hang on to its conglomerate licence.

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