Why is Temasek selling Watsons? It's elementary

Why is Temasek selling Watsons? It's elementary

By: 
Nisha Gopalan
09/01/19, 04:06 pm

(Jan 9): Private equity firms in Asia, which are sitting on plenty of dry powder, can look to a fresh target in the world’s largest health and beauty retailer. They may get a bargain.

Temasek Holdings is considering selling part of the 25% stake it holds in A.S. Watson & Co, Vinicy Chan and Elffie Chew of Bloomberg News reported Monday, citing people with knowledge of the matter. It paid HK$44 billion ($7.6 billion) to acquire its interest in 2014 from Hong Kong-based CK Hutchison Holdings, which remains the controlling shareholder.

It’s hardly surprising that Temasek is seeking a partial exit. When the Singapore investment firm bought its stake, CK Hutchison said it planned to list the business within three years. That hasn’t happened. More importantly, bricks-and-mortar retailers have lost appeal in the eyes of global investors as more business moves online. That trend is exemplified by Amazon.com Inc, which overtook Microsoft Corp in US trading on Monday to become the world’s largest company by market value.

A.S. Watson is big and profitable, with 14,500 stores in 24 markets. In 15 of them, it’s a market leader, Goldman Sachs Group Inc. said in an August report. In its Hong Kong base, the firm operates the ubiquitous Watsons drugstore chain, as well as supermarkets and electronics outlets. Overseas drugstore operations include the UK’s Superdrug, Germany’s Rossmann and Netherlands-based Kruidvat.

CK Hutchison reported its retail Ebitda rose 15% to HK$7.5 billion in the first half of 2018 from a year earlier, on revenue that climbed 14% to HK$83.9 billion. A.S. Watson is one of the world’s most profitable health and beauty retailers, with an 8% Ebit margin of 7.7% in 2017 compared with 6.4% for Walgreens Boots Alliance Inc., according to Goldman.

None of that has helped reverse perceptions that the future belongs to e-commerce retailers. Global drugstore chains have all seen their values drop since 2014. A.S. Watson has proclaimed plans to open a store every seven hours, an anachronism in an era when more transactions are migrating online.

That’s particularly the case in China, where A.S. Watson’s focus remains on physical stores in a market where online shopping has grown much more rapidly than in the rest of the world. As much as 25% of household and personal care products are bought online in China, versus between 6% and 12% in the US, Europe and the rest of Asia.

While the Watsons drugstore chain is the market leader in China, its share was unchanged at 1.8% last year compared with 2015. No. 2 player Guoda, owned by Sinopharm Group Co., moved up to 1.1% from 0.9% over the same period, according to Euromonitor International.

Little wonder, then, that on a three-year view CK Hutchison’s retail net profit has gone sideways.

A private equity firm is among the more likely buyers for the Temasek stake, given the amount of industry money that’s sitting idle. That said, any acquirer will still be in a minority position, even if the entire 25% is sold. Along with the business’s poor growth prospects, the absence of control is likely to be reflected in the valuation.

This is one retail sale that will need a discount to be attractive.

Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter

Treasure hunting

British collector and expert Harry Fane talks about what it takes to be the world’s foremost authority on vintage Cartier creations and how to spot a good investment buy at his Vintage Cartier Tank watch exhibition at Dover Street Market Singapore (May 20): Harry Fane’s love affair with Cartier began at the tender age of 17. It was the 1970s and his best friend showed up one day, decked out in two must-have items of the era: a pair of Gucci shoes with a gold buckle — “the height of fashion at the time” — and a Cartier watch. “I remember going, ‘Gosh, I really want both of....
Read More >>

Next stop: The interchange of public and private good

SINGAPORE (May 20): Two-minute intervals between trains. Fewer breakdowns. Clean, new buses running at a higher frequency. Bright LED screens displaying details of stops on both buses and trains. To many commuters who are enjoying these benefits, the meltdown of Singapore’s transport system in December 2011, and again in July 2015, is a distant memory. Certainly, services have improved significantly. There are new trains and buses, while existing ones have been spiffed up. There has been an overhaul of the older rail systems, presumably including fixing the grips for the electricity rail ....
Read More >>

Failed Innopac deal portends mining magnate Gutnick’s woes in Australia

SINGAPORE (May 20): The Australian Securities and Investments Commission (ASIC) is seeking judicial permission to wind down mining company Merlin Diamonds. The regulator is also probing into whether its chairman Joseph Gutnick failed in his duties. Gutnick, who is known as “Diamond Joe”, is under investigation for a A$13 million ($12.3 million) loan made by Merlin to AXIS Consultants, a private company linked to him. Merlin shares have been suspended from trading since October 2018. ASIC is seeking an order to appoint Deloitte to liquidate Merlin, owner of the Merlin Diamond Mine Pro....
Read More >>