Woolworths Is Demerging: What Does It Mean?

Alec Renehan: [00:00:00] Bryce, on the show, we often talk about how crypto curious, here we are. Oh, we are interested to watch this asset class develop. Despite the fact that a lot of heat has come out of the market. Ailun stopped buying. He hasn't stopped tweeting. He he had a Baby Doe's song tweet earlier this week, so he's still toiling away. But look, there's, there's so many platforms out there. There's so much choice out there. We've had a look at a number of them. And we and when I say we, I mean equity mates, users, swift x when we want to buy crypto for our company, Treasury. [00:00:42][42.4]

Bryce Leske: [00:00:43] That's right, Ren. We have snuck a little bit of crypto onto our balance sheet here at Acclimates using Swift X, Australia's fastest growing crypto trading platform with over two hundred and twenty different crypto assets. So plenty to choose from. They have tiny spreads, low fees and allow you to deposit via bank transfer, credit card or PayPal and Ren. The best news is, as you said, with markets a little bit lower than they have previously been. If you're looking to deputize into the water, Swift is offering fifteen dollars of Bitcoin to every person who signs up by heading to Swift X.com that use equity markets, that swiftx.com.au/equitymates for fifteen dollars of Bitcoin. [00:01:22][38.9]

Bryce Leske: [00:01:23] Welcome to another episode of Equity mates. This is a podcast that follows our journey of investing. Whether you're an absolute beginner or approaching Warren Buffett status, our aim is to help break down your barriers to investing from beginning to dividend. My name is Bryce and as always I'm joined by my equity buddy Ren. How are you going? [00:01:41][17.8]

Alec Renehan: [00:01:41] I'm very good. I was pretty impressed with that. You are. You were going to get the intro, but you said, nah, I know it off by heart. My life. [00:01:50][8.5]

Bryce Leske: [00:01:50] I didn't after five years. [00:01:51][1.2]

Alec Renehan: [00:01:52] Oh, you've changed the semi recently. True. True. But look, I'm excited for this episode, as always, but particularly this one, because you've been employed by Woolworths for a while and you are no longer employed by Woolworths. [00:02:06][13.9]

Bryce Leske: [00:02:06] No. [00:02:06][0.0]

Alec Renehan: [00:02:07] And so you can now finally talk about Woolworths. Yes. And so this episode is going to be Bryce diching on Woolworths. Let's start at the top. What do you think of Bradman Gee CEO? [00:02:17][10.3]

Bryce Leske: [00:02:18] He's actually an amazing say. [00:02:19][1.0]

Alec Renehan: [00:02:19] Yeah, there you go. Come on the show. [00:02:21][1.5]

Bryce Leske: [00:02:22] Come. I did him and I did you. No response. So, Brad, if you're listening, we'd love to have you on the show. But look, this episode is all about the Woolworths and endeavored group demerger. There's plenty of conversation happening in our community at the moment off the back of the Adam Doors by or so episode. [00:02:40][18.4]

Alec Renehan: [00:02:41] If you haven't listened to that episode, go and listen to it. It's a cracker. It is [00:02:44][3.2]

Bryce Leske: [00:02:44] a cracker. And in that, there was mention of the demerger and what it means for shareholders of Woolworths when it comes to getting the two for one yes. Stock and subsequently plenty of questions coming through the community. So we're actually going to walk through why there is a demerger happening, what is a demerger and how does it work, and then more importantly, what it means for existing and new shareholders of Woolworths. And then also, what does it actually mean for the companies themselves? [00:03:13][28.7]

Alec Renehan: [00:03:14] Yeah, and we're going to talk about some other historic examples of mergers. I lived through one when I worked at Coles that we can talk about a few others. But this is going to be a price heavy episode, which is great because we've just come off your thirtieth weekend away from promise. [00:03:30][16.6]

Bryce Leske: [00:03:30] There'll be no more thirtieth [00:03:31][0.5]

Alec Renehan: [00:03:34] and I'm feeling a little worse for wear, so I love the price of Ren [00:03:38][4.2]

Bryce Leske: [00:03:38] just can't handle the body, can't handle the [00:03:41][2.8]

Alec Renehan: [00:03:41] party. I went in sick and I've come out sick. [00:03:43][2.1]

Bryce Leske: [00:03:44] That's not enough because I don't think. [00:03:46][2.3]

Alec Renehan: [00:03:46] No, no, no. [00:03:47][0.8]

Bryce Leske: [00:03:48] Before we kick in, we are very excited to have the second half of meat pie love returning to the airwaves. They are part of the Equity Mates Network and it is a podcast hosted by Zoe and Carmel down in Melbourne, two sisters who are exploring the money side of relationships. All those conversations that you should be having with your partner or thinking about when you do get a partner. We're pretty excited that it's going to be back on Friday in in your podcast feed. And they're kicking off with an episode on buying a house, [00:04:21][32.9]

Alec Renehan: [00:04:21] buying a house. Do you have to wait until you have a partner to buy a house? Should you buy a house when you're single? All of the big questions, how should you buy a house [00:04:31][9.8]

Bryce Leske: [00:04:32] buying it in different names, buying it in the same night? Yeah, you name it. They're going to be talking through it, that one. [00:04:38][5.9]

Alec Renehan: [00:04:38] And then the next one is weddings. Oh, big one for you. Not so much for me. Yeah, but yeah. Look, the financial side of relationships often a taboo topic and Zoe and Carmel are doing some great work breaking it down. So whether you're approaching wedding bells like Bryce or still single but thinking about it. Like, meh, there's plenty there to learn about, to learn from a great series, great series. [00:05:07][29.0]

Bryce Leske: [00:05:07] Yes. And before we jump in, Ren dams are open to slide into if you're if you can. [00:05:16][9.1]

Alec Renehan: [00:05:17] So far, only people ask me about stocks [00:05:19][1.8]

Bryce Leske: [00:05:20] while they're open, but let's get stuck in. So the Woolworths demerger is it's just around the corner. And there is a lot of excitement within the community for for various reasons. But let's start at the top. What is happening and why? Well, Woolworths have a number of businesses within within that [00:05:41][21.2]

Alec Renehan: [00:05:42] we're starting at the very top of the stock is a company [00:05:45][2.8]

Bryce Leske: [00:05:46] not. So in summary, what they've done is they've merged their drinks businesses, which was in Devah that included, you know, their private label businesses. They also had BWC and they also owned Dan Murphy's. They've merged that with their hospitality business, which was L.H. to form a new, larger organization called Endeavor Group, now one of the largest operators of hotels and pokies and gaming rooms within Australia. And what they've done is put these two businesses together and call it Endeavor Group. [00:06:17][31.4]

Alec Renehan: [00:06:18] So conceptually, think about Woolworths, the parent company having two major companies that sat underneath it. One is a supermarket business, Woolworths, that owns a thousand-odd supermarket in Australia and New Zealand. And the other is a liquor business that owns the liquor production, the liquor stores, and then pubs and pokies business as well. [00:06:39][21.8]

Bryce Leske: [00:06:40] Yeah, and distribution for those in Sydney. They also own Jimmy brings. I don't know [00:06:45][5.2]

Alec Renehan: [00:06:45] if even just in Sydney. [00:06:46][1.0]

Bryce Leske: [00:06:46] That's what I was going to say. I don't know. But I'm genuinely seeing it in [00:06:50][3.2]

Alec Renehan: [00:06:50] Jimmy Brings when the big lift at your 30th weekend, [00:06:52][1.9]

Bryce Leske: [00:06:54] big lifting [00:06:55][0.4]

Bryce Leske: [00:07:00] that that was completed in February 2020. And then Woolworths did this because they have an intention to actually then separate Endeavor Group from Woolworths group, and that is now the demerger that is happening. [00:07:13][13.2]

Alec Renehan: [00:07:13] And we will get into why in a sec, because I think that's the relevant question that comes to mind. Like, you've got this massive business that you've been building and investing in. Why would you get rid of it? But great question. Let's put a pin in that. But just noting that we'll come back to. Yeah. [00:07:30][16.5]

Bryce Leske: [00:07:30] So a few other stats. The demerger is going to create two independent ASX-listed companies. So Endeavor Group is then going to be listed on the Australian Stock Exchange, as is Woolworths, which is already listed. Both are likely to sit within the ASX top 50 companies. Brokers are valuing Endeavor Group between nine point three billion and twelve point five billion. So it's going to be a sizable company once it lists on the Australian Stock Exchange. [00:08:01][30.8]

Alec Renehan: [00:08:02] And just for context, you know, Woolworths is right now a fifty-three billion dollar business. That's its current market cap, according to the market. And so Endeavor Group is about 20 percent of the business. Yes. [00:08:15][13.5]

Bryce Leske: [00:08:16] Yeah. And so Woolies is actually going to lose part of that market cap once it demergers, which we'll chat about in a second. But Posti merger endeavor will own the largest network of retail alcohol stores in Australia, with annual sales of about ten point six dollars billion. That's one thousand six hundred and thirty liquor stores throughout Australia, as I said, including Dan Murphy's and BWC. They have three hundred and thirty-two hotels and a strong twelve thousand three hundred and sixty-four electronic gaming machines across seventeen hundred liquor sites or hotels around Australia. From memory. They are one of, if not the largest operator of gaming poker machines in Australia. So, look, if you're interested in that sort of investment and want to get in the liquor game, we have done a deep dive into the alcohol industry. Endeavor Drinks is going to be a significant player here in Australia. [00:09:11][55.7]

Alec Renehan: [00:09:12] Yeah. So to put a bow on what is happening and what is happening, we'll get to why Woolworths is a fifty billion dollar business to use round numbers. They've got a 30 billion dollar supermarket business, a ten billion dollar, you know, big business. And it's definitely not a ten billion dollar and then a ten billion. I'm just sort of used to making money. I'm pretty sure Woolworths came out and said, we want to get rid of it. They couldn't sell it like it's worth nothing. Yeah, yeah. [00:09:44][31.9]

Bryce Leske: [00:09:44] It was to turn around. [00:09:46][1.5]

Alec Renehan: [00:09:46] Let me let me rephrase. Woolworths is a fifty billion-dollar business. They have a 40 billion dollar supermarket business. They have a zero dollar general store, big W business, and then they have a ten billion dollar alcohol. Business after the merger, Woolworths will be worth 40 billion dollars in dividends, will be its own separate company, worth ten billion dollars. [00:10:07][21.3]

Bryce Leske: [00:10:09] That's putting it out there, splitting it out. Yes. So let's go back to basics. What is a demerger? Pretty, pretty straightforward. It's a transaction where a business carried on by a company within a group is taken out of that group and run under separate management. However, the key point here is that all or some of the same shareholders get access to that new business and remain within the new business. So so that's the difference here with a demerger otherwise known as a spin-off. So existing shareholders still remain in that new business. [00:10:46][36.9]

Alec Renehan: [00:10:46] Yeah, and shareholders don't have to buy the new shares. If you own Woolworths shares, you're an owner of Endeavor Group. Today, when the two companies split up, you will just be given shares in Endeavor Group because you own that company as part of being a shareholder. It's like your price. And I if if I own the podcast business that equity markets and you own the social media business and we demerge the social media business, we would own shares in both businesses. You'd hope so. You would you would go and run the social media business. I would run the podcast business. But yeah, we just splitting the company basically. [00:11:22][35.6]

Bryce Leske: [00:11:22] Yeah. So in this specific example, it's called in in Specky Distribution. This is a new term that I learned. But really what it means is that the process of distributing this asset in its physical form rather than selling it, it's distributed via the transfer of stock. [00:11:40][18.4]

Alec Renehan: [00:11:41] So the other way this could happen, it's not so much a demerger is if Woolworths went to college and were like, do you want to buy Endeavor Group? Yes. And Coles paid ten dollars billion, got into a group, then you as a Woolworths shareholder wouldn't get shares in Coles or something. You would just get cash. [00:11:57][16.1]

Bryce Leske: [00:11:58] You'd get that special dividend. Yeah, exactly. In cash. But in this instance you're getting a spin off. You're getting access to the shares of Endeavor Group. [00:12:08][10.4]

Alec Renehan: [00:12:09] So then for shareholders, as we've said, you will get if you're a Woolworths shareholder by that set date, which is the 25th of June, you're actually fact-checking Adam Dawes on this because he said, what, the 16th of June? So Adam Bryce is calling you out here, but you actually did have heaps of other knowledge. So. Fairclough But yeah, but if you own Woolworths shares before the 25th of June, it means that when the demerger happens, you will get in your brokerage account and endeavor group Chatwood will show up. They're not on the 25th of June. That will happen later. But that's the date. You have to own the shares. [00:12:53][44.1]

Bryce Leske: [00:12:53] Yes, you have to own the shares by the twenty fifth. Then you get a two for one, deal [00:12:58][4.4]

Alec Renehan: [00:12:59] for one so that [00:12:59][0.9]

Bryce Leske: [00:13:00] your own Woolies stock, you'll get an Endeavor stock for free essentially. Now we have had a question on this come through from the equity markets community wanting some clarity around eligible shareholders of Woolworths stock. So we thought it would be a good opportunity to jump in here and answer that. Really, it means that you need to be registered on the demerger date, which is the twenty fifth in a number of particular jurisdictions being Australia, Canada, Hong Kong, Malaysia, New Zealand, Singapore, United Kingdom, and the US. That is one. And then there's another thing to consider. There's a small shareholders section where that if you own 800 or fewer Woolworths shares at the demerger date, you are classified as a small shareholder and you may elect not to receive Endeavor shares under the demerger. In this case, all of the Endeavor shares to which you would otherwise be entitled will be sold under there, you know, rules and regulations. So if you're a small shareholder and [00:13:59][59.1]

Alec Renehan: [00:13:59] you get the cash [00:14:00][0.5]

Bryce Leske: [00:14:01] and you get the cash and don't want to take it on, but I don't see why you would want to do that. Well, personally, [00:14:07][5.9]

Alec Renehan: [00:14:07] I can see why [00:14:08][0.8]

Bryce Leske: [00:14:09] you don't want to own [00:14:10][1.0]

Alec Renehan: [00:14:11] Australia's biggest. Oh, yeah. [00:14:13][1.6]

Bryce Leske: [00:14:14] So look, yeah. You don't have to take the shares if you don't want to if you're classified as a small shareholder, which is 800 shares or less. [00:14:22][7.7]

Alec Renehan: [00:14:22] So that's that's what is happening. And I guess in practical terms, how you get the shares, I mean, the long and the short of it is you don't have to do anything other than own Woolworths. The rest will be taken care of for you. Let's take a quick break and then talk about what it means for the companies because if we're going to be shareholders in these two companies, do we want to be shareholders? What's the future? Hold? Let's talk about that, because I think that's the interesting part of this conversation. Sounds good. But first, let's hear from our sponsors. Bryce, you're a man that moves to the beat of his own drum, actually literally moved to the beat of his own drum when you studied drumming back at uni. [00:15:03][41.0]

Bryce Leske: [00:15:04] Yes, it's is true. Got booted out. Yes. [00:15:06][2.1]

Alec Renehan: [00:15:07] And after you study drumming, you had a short-lived but highly successful career as a Canberra nightclub deejay. So you're all about moving to your own date. And that's great because our sponsor to kick off today's episode is all about banking to your own beat. And that is Virgin Money. [00:15:25][18.5]

Bryce Leske: [00:15:26] That's right. Ren banking with Virgin money has never been more rewarding. You can earn rewards on your everyday spending and pay zero monthly fees with the Virgin Money Go transaction account [00:15:36][10.6]

Alec Renehan: [00:15:37] and with points, perks, and epic experiences tailored to you. You can manage your money easily on the go, smash your savings goals, get money fit and be rewarded for it. So, Bryce, are you ready to bank to your own bait? [00:15:51][14.0]

Bryce Leske: [00:15:52] I'm ready to bank to my own bait. Ren Bank to your own bait virgin money [00:15:56][4.6]

Alec Renehan: [00:15:57] terms and conditions and monthly criteria apply. Now let's get into the show. OK, so Woolworths, the demerging and DEVGRU, they're going to be two separate companies listed on the ASX with their own ticker codes, their own share prices, their own management. This is the company equivalent of a divorce. The assets have been split. They're going their separate ways. As a former Woolworths employee, you got up close and personal with those businesses. So what does it mean? And then I'm going to ask you which one you'd rather own. [00:16:29][31.6]

Bryce Leske: [00:16:29] Oh, I love it. All right, Ren. Well, I will answer that which one I will invest in in a second. But what does it mean? So the new structure is going to result in both Woolworths holding and there's actually another company involved, but it's not worth discussing, but Woolworths holding a stake in Endeavor group. So if you are a shareholder, there is a fourteen point six percent stake in Endeavor group. And what does it mean for both companies as well? So this is actually going to be a partnership agreement. And what that means is that Endeavor Group is going to be supported by Woolworths via this agreement across various parts of their business, including the supply chain, including IT services, including marketing. And they're also going to get access to the Woolworths Everyday Rewards program. This is all about, you know, broadband, energy, creating an ecosystem. They don't want to have to put all of this intensive capital into running the business. But Woolworths has an extensive supply chain, extensive services, et cetera. And so you're looking at me confused. [00:17:32][62.9]

Alec Renehan: [00:17:33] Yeah, yeah. It's more about, isn't it? More about because I went through two demergers a Coles. I went through the hotel demerger and then I went through the Wesfarmers Coles demerger. Isn't it more about a lot of the services right now are shared across the group? You know, you build DSD distribution centers across the group, you have IT systems across the group, you have service contracts across the group. You know, like I was dealing with like waste, but also like electricity, all that stuff. You have shed buildings and shed tenancies. And so it's just like you can't you can't just have a clean break. [00:18:06][33.9]

Bryce Leske: [00:18:07] Yeah, well, I mean, the classic example in this situation is every Woolworths store has a beat-up excess next door. [00:18:12][4.9]

Alec Renehan: [00:18:12] Yeah, yeah, yeah. And the [00:18:13][1.1]

Bryce Leske: [00:18:13] police come in the back that you [00:18:15][1.6]

Alec Renehan: [00:18:15] know. Exactly. And Woolworths was paying rent on the full building and now you have to split that. But it's yeah. There are shared services, shared electricity, shared water, all that stuff. [00:18:25][9.9]

Bryce Leske: [00:18:25] Yeah. Because of that. And I found this interesting endeavor group is actually going to be paying Woolworths five hundred and sixty four million dollars a year, of which around 80 is expected to be classified as top line revenue for Woolworths and about three hundred million as other revenue. That's part of the agreement. So this is not just going to be a sweet divorce and they don't talk to each other. They're selling their demerging it, but they're still going to have a very, very close working relationship. [00:18:52][26.3]

Alec Renehan: [00:18:52] There were even things when Wade emerged when Coles emerged from Wesfarmers around. There were sites were like there was Coles superstores and it was like a Kmart and Coles in the same building. Wesfarmers held on to Kmart. Coles split out. And it's like there was only one tamira. Yeah. And stuff like that. And it's like, well, what are the rules are erm can we share now separate companies. Yeah. [00:19:16][24.1]

Bryce Leske: [00:19:17] Yeah. Yeah. So yeah look that's what it means for both companies. But let's have a look in more detail at what it means for the individual companies. And there is no doubt that for Woolworths, Brad has been very public in suggesting that the one of the main contributors and reasons for this is to put Woolworths in a place where they are going to be able to be better placed to tackle social issues. [00:19:40][23.2]

Alec Renehan: [00:19:40] So we put a pin in the why earlier. Now we're underpinning that pin and let's have that conversation. [00:19:45][4.7]

Bryce Leske: [00:19:46] Yes, underpinning that. And really what that comes down to is for a long time, Woolworths have not been able to position themselves as an attractive, sustainable investment ESG investment because they are so heavily involved in alcohol. And also gaming [00:20:04][18.4]

Alec Renehan: [00:20:05] is if if for long time equity mates, listeners, we've had Adam their way from Future Super on the show a couple of times. We play a game, ethical or unethical. And I always loved putting Woolworths in there because Woolworths always fell on the unethical side of the investing divide because they are one of the largest poker machines operators in Australia. [00:20:28][22.9]

Bryce Leske: [00:20:28] Yeah. However, now that they will be able to rid themselves of that side of the business, it's going to open up incredible opportunity and access to pools of capital from around the world who are looking to have wanted to invest in Woolworths for a long time, but due to their own RSJ frameworks, haven't been able to do so. [00:20:50][21.8]

Alec Renehan: [00:20:51] Yeah, so we're talking here about Australian superannuation funds, Canadian pension funds, you know, Norwegian sovereign wealth funds. There's a lot of money out there. That has some ethical mandate that has rules around what they can and can't invest in and word on the street, actually, I think Adam told us this in the interview we did with him, that broadband, which has been getting calls from them saying we want to invest in you, but we can't because of your poker machine business. Brad Banducci, splitting the unethical part of his business out means that all of a sudden all these massive pools of capital can now include Woolworths in the investing universe. [00:21:33][42.7]

Bryce Leske: [00:21:34] Yeah. So, look, no doubt that that is one of the main drivers for why they're doing this. And it's going to be an incredibly important impact on Woolworths. Another thing to consider is that by removing two of those businesses, the gaming and the liquor, they're going to be able to refocus on other areas of revenue within the business. So a couple of businesses that Brad and the team have been building out over the last few years is obviously Woolies ex, which is their online business, which is pretty integrated into the supermarket side of things. They also have comitology media, which is all within the media industry. So another separate, I guess, business that they're building out, that is leveraging the insights that they get through the supermarket business and creating a media business there. And then they're also I'm pretty sure they're majority owner of Quantium, which is an incredibly powerful data analytics company. I feel like I [00:22:33][59.5]

Alec Renehan: [00:22:34] bought the rest of it or something to know. [00:22:35][1.5]

Bryce Leske: [00:22:36] Yeah, I feel like it that a majority shareholder, if not solely, but anyway. [00:22:40][4.2]

Alec Renehan: [00:22:40] Yeah, yeah. They bought they originally acquired 50 per cent in 2013 and then I think they now have a controlling interest in it. Yeah. As of twenty, twenty one [00:22:50][9.5]

Bryce Leske: [00:22:51] incredibly powerful data analytics company Quantium, which they're obviously leveraging both within their business. But it's another great revenue stream. So they're going to be able to refocus on creating this ecosystem within their universe. That's going to generate incremental earnings outside of liquor and gaming. [00:23:10][19.6]

Alec Renehan: [00:23:11] So lets before we get to what it means for the endeavor, let's just wrap up the Woolworths thing. So two key reasons. First of all, that ethical concern is no longer there and it opens up more investors to invest in Woolworths. And secondly, it allows them to focus their investments in terms of like taking their profit, reinvesting it in the business. It allows Woolworths to focus on things that they think will drive greater revenue, greater profit over time. A lot of those digital-focused, media-focused love that everyone's got a media business. So those are the two key reasons. Yeah, yeah, yeah. [00:23:50][39.7]

Bryce Leske: [00:23:51] So what does it mean for Endeavor? Well, they're not going to be [00:23:55][3.8]

Alec Renehan: [00:23:57] they will not get screens [00:23:59][2.1]

Bryce Leske: [00:23:59] yet. They will not be passing, I think, Australian screens, that is for sure. But what it will allow them to do, you know, for for a long time, they haven't really been putting a whole heap of Woolworths group, hasn't been putting a whole heap of money and resources into actually reinvesting and improving the fleet of hotels and whatnot around the country and poker machines. [00:24:24][24.4]

Alec Renehan: [00:24:24] Come on. [00:24:24][0.2]

Bryce Leske: [00:24:25] Well, that's the sector. You've got your hotels. But I'm also saying, like you, BWC, you, Dan Murphy's, those sorts of things in terms of their actual percentage of stores per year that they're reinvesting in, it's lagging the market. So they're going to refocus on upgrading more stores faster than they have been, which we know does generally lead to incremental growth per store. Secondly, they will be rejuvenating their gaming network, as they phrased it. It's a technology-driven industry. In other words, they're going to be putting poker machines in, I guess, that are top of the market, more attractive, you [00:25:04][39.8]

Alec Renehan: [00:25:05] know, which is honest music to your ears. To say you are loving [00:25:11][6.4]

Bryce Leske: [00:25:12] is the reason they haven't been able to do that is that they've been bound by Woolworth's groups as framework and mandate, which I'm sure pretty much says, let's not pour all of our profit into upgrading [00:25:26][14.0]

Alec Renehan: [00:25:27] our [00:25:27][0.0]

Bryce Leske: [00:25:27] poker machines. So now they're going to be separated from that. They're going to be able to reinvest more back into the business at a at a faster rate, which we know hopefully will lead to to greater topline. [00:25:39][11.7]

Alec Renehan: [00:25:40] So that's the I guess that's the bull case for both of these companies. Woolworths can reinvest in what really matters to the core business. They may be able to get a valuation like multiple improvements because there's a lot more money pouring into the sector, pouring into the company for Endeavor. They can focus on their core. Businesses, they're free from the constraints of some of Woolworths ESG policies. That's the bull case. But at the same time, there's definitely a bear case. There's a lot of synergies between these two companies. There's a reason that Woolworths has the biggest supermarket franchise and the biggest liquor franchise in Australia. Um, what's the potential downside for both? Yeah. [00:26:29][49.7]

Bryce Leske: [00:26:31] Good questions. [00:26:32][0.3]

Alec Renehan: [00:26:34] Well, you're such a Woolworths, but yes, it's no downside, so that making the case, why doesn't every company split off all their businesses? [00:26:40][6.2]

Bryce Leske: [00:26:41] I mean, because there's a there's a reason up until now that they've wanted to be involved in the liquor. You know, their competitors have been involved in the liquor game. You know, businesses build other businesses and acquire other businesses to drive revenue growth to a source of growth and value creation for shareholders. So there's plenty of reasons why they've got to this point. But equally, I think now, you know, the reason that they're demerging is to continue to drive shareholder value and, you know, I think become more competitive. [00:27:16][34.7]

Alec Renehan: [00:27:16] So so I ask you for the back end up talking about I love Woolworths. Well, let me talk about the fact it's just so giving at least the illusion of impartiality. Sure. So I think there's two key risks. The first one is that in some businesses, one plus one does equal three, like there are synergies in a supermarket business and liquor business, like a retail business that really matter. The fact is that every Coles has a BWC beside know, every Coles has a Liquorland beside them. It's been a while. Every Woolworths has a BWC or dance near the. And it allows it allows, like, you know, supply chain cost to be reduced in some instances, you can put multiple loads for, like, both of them on the same truck. But it also allows the business to like cross promote and, you know, to drive customers to attract customers to either one store and then drive them into the other to do deals across both stores. I don't know how much you cross selling liquor, but there are synergies that they will lose. [00:28:24][68.0]

Bryce Leske: [00:28:26] A lot of those, though, we're not going to be losing. [00:28:28][2.6]

Alec Renehan: [00:28:29] Well, you think you say that now, but the fact of the matter is that over time, the two businesses with different management, Woolworths is a minority shareholder in the endeavor. And so business over time, you know, right now everyone who's going to run Endeavor will bleed Woolworths green. Yeah, but over time, Endeavor will become its own business. So so that's the first one that you potentially do lose some synergies. The second one is that there are some shared products that have been supporting both businesses that become a little bit more fraught. So when Coles and Wesfarmers merged the flybys program is this incredible value creator. It's so valuable it had to, like, be split off into its own joint venture that was jointly owned between Wesfarmers and Coles. I don't know what the status of Woolworths everyday rewards is. Will it stay with Woolworths? Will it become a joint venture? But it will be interesting to see what happens there. [00:29:28][59.4]

Bryce Leske: [00:29:29] I think it's access to [00:29:30][1.2]

Alec Renehan: [00:29:31] the everyday rewards. And so far that probably hurts endeavor more that they then are just like a partner of Woolworths with everyday rewards rather than someone who owns it and can drive the direction of it and stuff like that. But that's just one of many of these sort of shared value creators that will now have the scale that they did before in some ways. [00:29:52][21.2]

Bryce Leske: [00:29:53] Yeah, I mean, yeah, interestingly, Dan's is actually not part of that anyway. Yeah, they have their own rewards program. [00:29:59][6.8]

Alec Renehan: [00:30:00] Okay, well then maybe I take it back. I mean it's not as [00:30:02][2.5]

Bryce Leske: [00:30:04] BWC though does obviously use the everyday rewards but yeah. Good bear case. Bear case for Endeavor I guess would be the same. [00:30:11][7.4]

Alec Renehan: [00:30:12] Well yeah. It's like it's a slow growing business. So for people that haven't had the retail background that we have, you think of Bunnings as a category killer. You think of baby bunting as a category killer. Dance was the category killer in liquor, like it just could get it had the most scale. It could get the lowest prices. It had the best range. Yeah. Dance was the gold standard. Yeah. I think that there is a lot of efforts to erode that. So there's a question about what the future of Danz malt is I guess. Yeah. And then the second question about Endeavor is there is a lot of regulatory risk around pinning your hopes to poker machines. [00:30:57][45.4]

Bryce Leske: [00:30:58] Absolutely. [00:30:58][0.0]

Alec Renehan: [00:30:58] And it wouldn't surprise me if that business is get has some value write downs over time. As you know, governments around Australia crack down on that stuff. [00:31:09][10.3]

Bryce Leske: [00:31:09] Show me a government that's going to crack down on poker machines. Well, anyway, let's not get into that. Let's we're going to have a look at some of the historical examples of some major mergers in Australia, because interestingly, it often does create a lot of shareholder value on both sides of the coin. And we've got some examples to show you. So stick around. We're going to hear a quick word from our sponsors. [00:31:35][25.5]

Bryce Leske: [00:32:44] OK, Ren will, as you've mentioned many times in this episode, Coles, Wesfarmers, Steve [00:32:50][5.7]

Alec Renehan: [00:32:51] on you, you want to move on to other examples of demergers? Well, but I am noting that I asked you a question that you haven't answered about Woolworths and Endeavor. [00:33:02][11.1]

Bryce Leske: [00:33:03] Which one would I invest in? [00:33:04][0.5]

Alec Renehan: [00:33:04] Which one would you which do you think going to do better? I'm going to say I do twenty over twenty twenty-four month time horizon. [00:33:10][5.5]

Bryce Leske: [00:33:11] Twenty four month time horizon. I am going to go. I know the stats on this historically, but I'm going to go Woolworths. I'm backing in Woolworths sacking a little and then I that does go against the stats but I'm backing in Woolworths to be a better performer. Definitely long term. Better performer. Shorter term. Yeah. Stats. The stats tell me that it's history tells me that it's going to be in Dubbo. [00:33:39][28.1]

Alec Renehan: [00:33:40] Yeah. Okay. I would say I would agree with you that I think Woolworths is going to buck the trend. But let's not talk about let's not mention the stats. I'm not talking about them. Tell us about the history. Tell us why history says endeavor will do better. [00:33:53][13.0]

Bryce Leske: [00:33:53] Yeah. So Morgan Stanley has conducted analysis of 23 mergers in Australia since 2000, and it shows that both the merged entity and the parent entity have outperformed the market, particularly in the first year after demerger, the median outperformance was 17 per cent for the actual demerged entity. So that would be in group and over seven percent for the parent entity or Woolworths. So that's outperforming the market, which is pretty phenomenal returns for the first year. So that's why I would say that history tells us that we could expect endeavor to to be the star performer over the next year or so. But for me, I think Woolies is going to buck that trend. [00:34:39][46.1]

Alec Renehan: [00:34:40] So let's talk about some other examples and let's start with Wesfarmers and Coles, because that's another one that we have personal experience with. So in twenty eighteen, so Wesfarmers owner of Bunnings, Kmart, Target, Officeworks, a bunch of other businesses and also owned Coles Group. In twenty eighteen, Coles was merged and became its own standalone company again. Since then, Coles up about twenty four per cent, Wesfarmers up 76 percent. So yeah. So Wesfarmers has had an incredible run since then. It is. So when Coles put out it was like 15 bucks a share and so Wesfarmers lost about fifteen dollars a share of share price like it went down fifteen because Coles was split without. Wesfarmers has now eclipsed where it was when Coles was part of the group. Its share price is higher than pre demerger chase. [00:35:38][57.9]

Bryce Leske: [00:35:38] Yeah, shareholders loving the fact that they got rid of Coles and focusing all their energy on Bunnings, [00:35:43][4.7]

Alec Renehan: [00:35:44] Bunnings, Bunnings, and Kmart are just two incredible businesses. Bunnings a level about anything else. But Wesfarmers and Coles has been one where Wesfarmers bought Coles in 2007, sold it in twenty eighteen, did a bunch of stuff there that created a lot of value, but they realized that it was time and the market obviously agrees with them. Yeah, yeah. [00:36:06][22.6]

Bryce Leske: [00:36:08] And did you go both? You would have got both. [00:36:10][1.5]

Alec Renehan: [00:36:10] Well, I owned Wesfarmers shares and I was given Coles shares as part of the demerger. So in my eBay account, I have Wesfarmers shares. They have a cost base, like an average cost base that I bought them out. And then I have Coles shares listed under the where my cost basis. [00:36:26][16.1]

Bryce Leske: [00:36:27] And that is a very good point you raise there. And there are a few questions in the group around working out the tax implications of getting free shares without going into too much detail. Or I would say is there's plenty of stuff online and it's very straightforward on how to do it. [00:36:44][16.9]

Alec Renehan: [00:36:44] Nice way to avoid the question. [00:36:45][0.9]

Bryce Leske: [00:36:45] Yeah, we don't do tax on this, so [00:36:47][1.4]

Alec Renehan: [00:36:47] we can't do a tax on this show. So speak to a tax professional because they can give you specific tax advice. [00:36:53][6.1]

Bryce Leske: [00:36:54] Yes, but there are tax implications. Another few examples, Orica and Dulux, the paint. OK, so I hadn't heard of Orica, but I Googled it. It's an Australian based firm and it's one of the world's largest providers of commercial explosive and blasting systems to mining, quarrying oil and gas. So they obviously owned Dulux. That's at some point in time. And in 2010, shareholders received one Dulux share for each share that owned in Orica. The Dulux shares closed at two point fifty four on the day that I first started trading. Ten years later, shareholders received nine point seventy five as Dulux was acquired by another company. So that is a return of over 20 percent per annum. And what about market? Ten years? I don't know the price that Erica was at the time. [00:37:47][53.6]

Alec Renehan: [00:37:48] It's a Orrock is down from 2010 anyway, so Erica sucks. So you had your first guys, so Dulux definitely was the better of the two. [00:37:59][11.0]

Bryce Leske: [00:37:59] Absolutely. So another a few notable ones. You might remember the group spinning off a bunch of its random assets that they put together and called it S 32. And I think it's all companies that were below the southern hemisphere. [00:38:14][14.3]

Alec Renehan: [00:38:14] Mr. Adams spoke about this on his by holding cell episode. Yeah, thirty. Thirty two different minds or businesses that are all south of the equator. [00:38:23][8.7]

Bryce Leske: [00:38:23] Yeah, really weird. But this one did buck the trend. The spinoff company being South 32 actually underperformed in their first year. 20 percent down, however, has recovered subsequently three years later to be pumping out twenty eight percent. So go south thirty two. And then Fairfax and DeMain. Well, this [00:38:44][20.6]

Alec Renehan: [00:38:44] is this is one that I don't even know to look at the two respective share prices. What do you reckon Dumaine has to from from when they merged to today? Demesne has to have done better. [00:38:54][9.9]

Bryce Leske: [00:38:55] I'm going to have to fact check that. [00:38:56][1.2]

Alec Renehan: [00:38:56] Well, Fairfax got bought by nine. Yeah, but I mean, DeMain is an unbelievable business and Fairfax is a legacy newspaper business. [00:39:04][7.9]

Bryce Leske: [00:39:06] That's true. But in the first OK, the stats that I've got in front of me say within the first year to was actually down 30 percent. Wow. Yeah, but I'm sure it's come back. I can't get it up in front of me at the moment, but um. Yeah. [00:39:19][13.3]

Alec Renehan: [00:39:19] Interestingly. There you go. Yeah. [00:39:21][1.4]

Bryce Leske: [00:39:22] I guess the key message from this is that you can get value on both sides of the trade. As we said, history sort of suggests that the spinoff company is the one that is going to generate some short term gains. But longer term, my gut feeling is sitting with Woolworths. [00:39:39][17.8]

Alec Renehan: [00:39:40] Yeah. Now, let's we've got a bunch of questions from the community here. Um, and there's heaps more Woolworths and have a chat in the Facebook group. So if you have other questions or this episode has created questions in your mind that we haven't answered, head to our Facebook group and join the discussion there. But let's rip through some of these questions. Any thoughts on whether the upside is already priced in? [00:40:06][26.2]

Bryce Leske: [00:40:07] I mean, potentially, but there's going to be a lot of price movement when the demerger happens. And then we're going to say all of this money starting to come in from pension funds, etc.. So I would say probably broadly neutral. [00:40:20][13.5]

Alec Renehan: [00:40:22] Okay. I like the the value of endeavor is embedded in the Woolworths share price. Yeah. And so, yeah, you might they might be like incremental value creation by them being separate businesses. But to a large extent, yes, the value of endeavor is in the price of Woolworths. Um, it's just what they can do on top of that as standalone businesses. Yeah. Do you have to pay brokerage when you receive Endeavor shares. No, no, no. That's an easy one. Straightforward. Does it matter if you have a broker that is chess sponsored or custodial? It shouldn't. It doesn't. Yeah. Yeah. Like if you have a custodial broker so you don't have your you know, the shares aren't held on your own in um. The custodian will get those shares and we'll hold them in your name and they will show up in your brokerage account. Yeah, yeah. [00:41:20][58.2]

Bryce Leske: [00:41:22] This one is this one's a good one. What happens to all the shares in ETFs? No doubt everyone who owns a two hundred will be thinking, will that ETF be getting shares for Endeavor? So we reached out to the experts at beta shares who know all things ETFs. And their response was that for each share of Woolworths, the ETF owns, it will receive one share of endeavor as per depending on the index rules themselves. Typically what happens is usually both stocks will remain in the index and at their respective weights until the next rebalance. At that time, depending on the index rules, either both will remain in the index or one could be removed or both due to not meeting the requirements for inclusion. A requirement, for example, it needs to meet certain liquidity or size. If Endeavor fails on those, it might be removed. And you can imagine, you know, there's going to be a few inclusions of Woolies, et cetera, in some astute ETFs as well, I would imagine. [00:42:22][60.6]

Alec Renehan: [00:42:23] Yeah, I think if an ASX 200 ETF, you can be pretty confident that both Endeavor and Woolworths will remain in the index. Yeah, if you own, say, like an ethical ETF, Woolworths probably wouldn't be in them now. But if there is one with Woolworths in it, you can be pretty confident that endeavor will not be included in that. Yeah, yeah, yeah. [00:42:43][19.7]

Bryce Leske: [00:42:44] Nice. And the final one is how does pricing work? It's just market forces, really. So you're going to have the market cap of endeavor essentially removed from the market cap of Woolworths and then they're just going to be open to free-market forces when they're listed on respectively on the ASX. [00:43:00][16.1]

Alec Renehan: [00:43:01] Yeah, I think the key question here is so the Woolworths is pretty straightforward. One-day endeavor is part of the business. The next day endeavor is not part of the business. And so people trading Woolworths shares will take that into account and the market will set the price for endeavor. Think of it like a direct public listing. So it's not an IPO where there's like a set price, that they're raising capital a lot. And that's the price that at least on day one, it's a direct public listing. So like what Spotify did back in the day or roadblocks did recently, it's the shares then available to trade at a certain time and people start trading it. And whatever the people start trading it out is the price. Yeah. And so you might get a bit of volatility on the first day. But a lot of the market professionals, you know, the investment banks and the funds and the institutions have a pretty good idea of what value they think endeavor is worth. And so the price will settle pretty quickly. [00:44:01][59.8]

Bryce Leske: [00:44:02] Yeah. Yeah. So, yeah, just see what happens. I guess it's just if you're interested, check it out. But look, that does bring us to the end of the demerger. We do have a listener mail bag that we'd like to play here from Craig about out 30 stocks. So we'll give that a listen and quickly answer that. Hi, Bryce. I need to know if we can get an ETF off your top 30 that you did for your birthday. Thanks for that. [00:44:31][29.5]

Alec Renehan: [00:44:32] But that is a great question, Craig. Great question. [00:44:37][5.9]

Bryce Leske: [00:44:39] I'd love to do that. [00:44:39][0.7]

Alec Renehan: [00:44:40] Would you? Yeah. I mean, it would be good to say I don't know if I'd trust Bryce to create index rules and rebalance. And there's no rules there. Oh, no, no. That's not bad of no rules. [00:44:52][12.4]

Bryce Leske: [00:44:53] It's just whatever I feel like on the day. [00:44:55][1.5]

Alec Renehan: [00:44:55] Well, OK, I got [00:44:57][1.5]

Bryce Leske: [00:44:58] what we should do is actually put them all together and track them. [00:45:00][2.5]

Alec Renehan: [00:45:02] The other thing was we keep saying thirty stocks, there's a lot more [00:45:05][3.7]

Bryce Leske: [00:45:06] about forty five or [00:45:07][0.9]

Alec Renehan: [00:45:07] something. Yeah. Yeah. [00:45:08][0.7]

Bryce Leske: [00:45:08] But thanks for the mailbag Craig. We would love to do that. Stay tuned. I guess if there's any ETF providers listening to you [00:45:17][8.5]

Alec Renehan: [00:45:17] on that as well, come at us. But maybe just come on price because I don't know if I want my name attached to your, you know, rules that right now I think I'll back it. [00:45:27][10.3]

Bryce Leske: [00:45:28] If you would like to leave us some mailbag question regarding anything, head to our website. equitymates.com/contact and there's a form in there where you can quickly leave a voice message and upload it. But look, we do love hearing from you and the community, so please do hit us up at equitymates.com/contact. Otherwise, if you don't like being in the limelight, you can follow us on Instagram, Tiktok. Even Rens growing our TikTok account or join our Facebook take talk [00:45:57][28.9]

Alec Renehan: [00:45:57] Our TikTok is growing as fast as my hair touches. [00:45:59][2.0]

Bryce Leske: [00:46:01] Or you can join our Facebook discussion group. We've also got some big things coming with a new form, so stay tuned for that. There's always plenty of lively chat going on and in fact, a good. Group of you were really generous and shared your mistakes from your early investing journey with us, and we've been talking about that over on our Get Started Investing podcast. So if you want to hear some funny stories of people stepping up and what we can do about it to avoid making mistakes, head over to get started investing. But lastly, if you have found that equity mate is an essential part of your investing journey, then there's one thing that you can do to help us, and that is to write and review our podcast through your podcast app. Five Stars would be appreciated. If it's anything less than five, take it up directly with us. [00:46:49][48.5]

Alec Renehan: [00:46:51] Look, every podcast says it, but it is actually something that helps people discover the show. And as we grow, we can do more stuff. You know, we can get better guests, we can do more, you know, live shows. We can finally get some merch out the door. Yeah, maybe. No, we will. We have we have got merch. So the bigger the equity markets audience is, the more exciting it is for everyone. So you can help us get there by reviewing us and leaving a writing. So, yeah, we really appreciate it, if you can. [00:47:23][32.0]

Bryce Leske: [00:47:23] Absolutely. Well, Ren, as always, great to chat stocks, especially Woolworths situation. You can as you can tell where the big retail fans, but we'll leave it there and pick [00:47:34][10.4]

Alec Renehan: [00:47:34] and hold on before we go. Now that you've left Woolworths, reveal one thing that you couldn't, while you would not thought about everything. [00:47:42][7.7]

Alec Renehan: [00:47:44] I know could be. [00:47:44][0.0]

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