Wesfarmers admits defeat, abandons Bunnings UK after $436 million disaster

Bunnings is getting out of the UK. Photo / File

Bunnings UK is officially a sausage fizzle.

Wesfarmers has announced it is abandoning its flailing UK expansion and will flog off the Homebase chain it paid A$700 million ($764m) for in 2016, ending months of speculation about the dire state of the business.

The 24 pilot Bunnings stores will convert back to Homebase following the sale to Hilco Capital. Wesfarmers said it expects to record a loss of between A$353-A$406m on the disposal in its 2018 full-year financial results.

"A divestment under the agreed terms is in the best interests of Wesfarmers' shareholders and will support the ongoing reset and repositioning of the Homebase business," Wesfarmers managing director Rob Scott said in a statement on Friday.

Analysts have previously accused Wesfarmers of arrogance in thinking the UK could be won over by a "copy and paste" of the Australian model. "It's been a disaster from the moment they landed," Insight Retail Group's Steve Collinge said earlier this year. "I can't see anything they can do now."

Scott said the decision to exit followed a "comprehensive review" of the Bunnings UK and Ireland business, which considered a range of options to improve shareholder returns.

"While the review confirmed the business is capable of returning to profitability over time, further capital investment is necessary to support the turnaround," he said.

"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.

"Homebase was acquired by Wesfarmers in 2016. The investment has been disappointing, with the problems arising from poor execution post-acquisition being compounded by a deterioration in the macro environment and retail sector in the UK.

"While it is important that we learn from this experience, this should not discourage our team from being bold and diligent in pursuing opportunities to create shareholder value.

"We acknowledge the past six months have been particularly challenging for the BUKI management and our team members in the UK and Ireland and we thank them sincerely for their hard work and commitment.

"The operating performance of the business has improved in recent months under the new management team led by Damian McGloughlin and he will continue to lead Homebase in delivering management's turnaround plan.

"We wish Damian and the team well during the transition and as they take the business into its next chapter under a new owner with a track record of retail turnaround in the UK."

Under the terms of the deal, the buyer will acquire all Homebase assets, including the Homebase brand, its store network, freehold property, property leases and inventory for a nominal amount.

Wesfarmers will participate in a value-share mechanism entitling it to 20 per cent of any equity distributions from the business. The obligation is not time-limited, meaning Wesfarmers will participate in "any profitable divestment of the business in the long-term".

The divestment is expected to be completed by June 30, 2018.