Woolworths Begins Gambling Separation From Operations

Rose Varrelli | December 26, 2019 | Updated on: January 8th, 2024

Woolworths had a tough 2019 with regard to its relationship to its pokies business. An investigation by the NSW Liquor and Gaming Authority resulted in significant scrutiny and eventually a chance to the Woolworths business plan.

The ultimate result was a plan to separate gambling and alcohol from its primary business operations. A court approved the restructuring plan, and it is now ready for implementation in February 2020.

Pokies Investigation

The initial complaint came to light in June 2019 via a New South Wales Liquor and Gaming Authority notice. The incidences dated back to 2017 at two locations operated by the Australian Leisure and Hospitality Group (ALH).

Both locations were investigated for providing free alcoholic beverages to customers playing pokies to encourage them to gamble for longer periods of time.

Woolworths owned a 75% stake in ALH, which explained its ultimate responsibility.

The entire investigation expanded to 50 venues and was exhaustive and comprehensive, according to Deputy Secretary Paul Newson.

Many people, from lawmakers to Tim Costello of the Alliance for Gambling Reform, pushed for tough penalties for Woolworths and ALH.

Pressure to Act

The government and anti-gambling organizations put pressure on Woolworths to make changes, but one group had a particularly strong influence. One of the company’s primary shareholders, Perpetual Investments, said that pokies were a threat to Woolworths’ entire brand and reputation. They also called for all pokies to be removed from Woolworths-associated establishments.

That led to a significant decision in July, not long after the initial story broke and created a whirlwind of negative publicity for the company.

Woolworths decided to combine all pub and hospitality-related parts of its business into a spinoff called the Endeavour Group. This would separate it from all other family-focused aspects of the Woolworths brand and name.

This was to affect approximately 1,500 liquor stores and 327 pubs, approximately 30% of its business worth about A$10 billion.

Court Approval

On December 19, Woolworths announced that the Federal Court approved its restructuring plan to create the Endeavour Group.

Further, Woolworths set an implementation date of February 2, 2020. At the same time, Endeavour Group will be combined with Bruce Mathieson Group’s interests in ALH.

Details, Details

Per a December restructuring meeting, Woolworths revealed more details about the plan.

Woolworths will keep its focus on its core food and retail businesses and its exclusive brands. Australia-based brands comprise 86% of the business, with Countdown brands operating 14% of the business in New Zealand. Together, the pro forma revenue was approximately $49.7 billion in 2019.

The drinks/hospitality business will be comprised of Dan Murphy’s and BWS liquor stores, Pinnacle Drinks, and ALH Hotels. Woolworths’ portion of the business is 43%, ALH’s drinks-related business is 23%, and ALH Group hotel comprises 34%. Pro forma revenue for these entities in 2019 delivered about $10.3 billion.

Three Stages of Transformation

The first stage will consist of the internal restructuring and reorganization to create the legal Endeavour Group entity. Woolworths will implement this part of the plan at the beginning of February 2020 with these goals:

To simplify Woolworths’ corporate structure
To create a distinct legal entity
To facilitate the ALH merger and ultimate separation

The second stage of the plan is the ALH merger, in which Endeavour will acquire BMG’s interest in ALH in exchange for 14.6% of Endeavour Group shares. This will happen at the beginning of February, too. And the goals are:

To integrate the Woolworths Drinks Business and ALH Group operations
To facilitate the ultimate separation

Finally, the third stage of the plan is that separation of the Endeavour Group from Woolworths Group through a demerger or similar process. The goal of this is a bit broad but will become clearer as the first two stages are completed:

To create simpler businesses, more focused and independent
To prepare the company for future growth

Woolworths expects to complete this process by the end of 2020.

Overall Reaction Difficult to Predict

A look at the Woolworths’ share price on the Australian Securities Exchange (ASX) over the past month shows a decline and some tumult.

Prices had been steady in the $38-$39 range for a bit until November 2019 when the company revealed its full-year earnings. The 12 months through June 30, 2019 resulted in a total earnings’ decline of $1.5 billion, which was a 7% decline on the previous year.

In addition, the average earnings growth rate for the past five years appeared to be down 14%.

This prompted an extreme dip in the stock price of WOW.AX from $39.79 to $37.66 and then down to its current low of $37.26. It appears that shareholders are spooked by the full-year report despite showing confidence in the restructuring efforts scheduled for 2020.

The overall response to the restructuring, both in consumer and shareholder reactions, will be clearer by mid-2020.