Industrial conglomerate Wesfarmers Ltd (ASX: WES) announced to the market this morning that it had shelved its plans to sell off its Officeworks division in an initial public offering (IPO). The reason, apparently, was that the likely price to be realised was not high enough:
"In light of current equity market conditions, Wesfarmers has determined that an IPO of Officeworks at this point in time would not realise appropriate value and would not be in the best interests of its shareholders."
Management was quick to reaffirm the potential of the business, stating that they'd lifted Officeworks return on capital (a measure of investment returns) from 5.9% in 2009 to 13.9% in 2017, and doubled earnings over the same time frame.
Some in the market had wondered if Officeworks' IPO was very timely given the coming entrance of Amazon into Australia. A slightly smaller but more vocal element wondered if the business was 'the next Dick Smith' (a retailer which went public and collapsed). However, management's subsequent decision to keep Officeworks in-house rather than accept a lower sales price does suggest they are confident in the business' prospects.
What could be more interesting is watching what happens to the Officeworks' segment revenue and profit margins now that the business is staying in house. Many companies have been accused of cutting expenses to the bone (thus making the business appear more profitable), in the lead-up to IPO, in order to command a higher price.
By watching the performance of the Officeworks segment as it stays within Wesfarmers, investors might be able to give themselves an advantage in the event that the business comes to market again in a couple of years' time. But for now – there's not much to see here.
