It seems that the Woolworths (ASX: WOW) plan to shed its poker machines could turn into a win-win deal all around.
After it announced the plan to give up control of its pubs and poker machines business by merging it with its bottle shop operations in a new company, the share market embraced the plan by bidding up Woolworths shares.
The departure of the pokies will see Woolies emerge as much more of a “clean’’ retailing company and potentially enlarge the pool of investors to include those here and overseas who might have ethical issues with investing in gambling.
Endeavour Group could also perform well
Now it also appears that the carved off company which will be called the Endeavour Group, could also benefit strongly from the plan with part owner, pubs billionaire Bruce Mathieson, saying that he expected Endeavour to now grow strongly.
Endeavour will already be a substantial company, with sales of $10 billion and earnings of around $1 billion a year but it could also enjoy substantial growth once it is removed and able to make independent investment decisions.
Time to renovate?
Mr Mathieson has pointed to the possibility of a renovation blitz across the 323 pubs and clubs in the group, potentially doubling the hotel accommodation available from the current 2,500 rooms.
Mr Mathieson owns 25% of the current ALH Group and will own an expected 14.9% in Endeavour Group, which also includes Woolworths’ interests in the Dan Murphy’s and BWS liquor chains.
He said while Woolworths had done a great job managing ALH, they had been concentrating on Dan Murphy’s and BWS rather than on the specific opportunities provided by the chain of pubs and clubs.
Woolworths management distracted
It is not surprising that Woolworths management has been consumed by other issues, with the Masters hardware debacle also a significant distraction in recent years.
Now freed of responsibility for a range of outside assets such as the pubs and clubs and liquor stores, management will be able to concentrate solely on the retail side of Woolworths which includes the supermarkets and the ailing Big W chain.
Woolworths remains a massive operation with $47 billion in sales and $2.7 billion of pre-tax earnings.
It includes 1,020 supermarkets and 183 Big W stores.
Pubs performing strongly
Pubs and clubs are already doing very well as an investment class with the listing of the Redcape Group (ASX: RDC) and the proposed listing of the Australian Venue Company, which is co-owned by Coles (ASX: COL).
More than $1 billion of Australian hotels changed hands in the past financial year with Mr Mathieson saying that pubs are very appealing for investors because they are often on large parcels of good land with the possibility of expansion.
Well run pubs in prime positions are also successfully luring many customers with food and drink offerings as well as poker machines.
Woolworths plans to either sell, demerge or float Endeavour on the share market at some stage in 2020 and will keep a minority interest in the group.
Woolworths has been pressured for many years by anti-gambling campaigners for being the biggest owner of poker machines in Australia, with more than 12,000 machines in its 323 pubs and clubs.
Through its 75% ownership of ALH, it also suffered damage to its reputation when it was shown that staff at ALH pubs were keeping personal information on high-turnover gamblers and giving them free drinks to encourage them to gamble more.
That scandal resulted in a raft of investigations by liquor and gaming authorities, with the New South Wales gaming regulator launching disciplinary proceedings over the scandal.
Woolworths shareholders will get their opportunity to vote on the proposal at the annual general meeting later this year.