ii view: Ferguson sells its UK Wolseley business

Shareholder activism is reshaping this plumbing distributor. Buy, sell or hold?

Agreed sale of UK Wolseley business

• Net cash consideration of approximately £308 million

Chief executive Kevin Murphy said:

"Wolseley is a leading heating and plumbing distribution business in the UK and we are confident the business will benefit from working with its new owners, Clayton, Dubilier & Rice who will develop the business further by focusing on continued opportunities in the industry. 

"The transaction further simplifies the Group and allows us to focus entirely on investing in and developing our business across North America where we have the greatest opportunities for profitable growth."

ii round-up:

Plumbing and heating products distributor Ferguson (LSE:FERG) today announced the sale of its UK Wolseley business to private equity firm Clayton, Dubilier & Rice for around £308 million.

The sale now leaves it totally focused on its North American business. Proceeds from the disposal, which is expected to complete at the end of January, will likely be returned to shareholders via a special dividend payment. 

Ferguson shares rose marginally in afternoon UK trading leaving them up around 30% over the last year. Shares for Wickes and Toolstation owner Travis Perkins (LSE:TPK) are down around 13% over the last year. 

Ferguson’s sale of Wolseley contrasts with its original plan to list the company on the UK stock market and comes in the wake of disruption caused by the pandemic. 

For its last full financial year to the end of July, Wolseley generated sales of £1.49 billion, or just under a tenth of the group’s overall total. Adjusted earnings (EBITA) came in at £7 million. On current full-year forecasts, broker UBS estimates a reduction in earnings per share of around 2% to 3%. 

Future responsibility for Wolseley’s UK defined benefit pension scheme will be retained by Ferguson Group. Ferguson is scheduled to announce first-half results on 16 March. 

ii view:

Attention from US activist investor Nelson Peltz in 2019 highlighted the company’s discounted valuation to the wider world. The result today is that its North American and UK businesses are going their separate ways, with plans to relist the North American Ferguson business in the US continuing to be pursued. 

For investors, a US stock market relisting for Ferguson may not suit all. Some UK-only focused investment funds may need to sell. First-quarter accompanying management outlook comments also remained cautious in tone, given ongoing challenges caused by the pandemic. But the sale of Wolseley does allow management to fully concentrate on its key North American business. A first-quarter return to organic sales growth after two prior negative quarters should also not be ignored, while previous plans to both recommence bolt-on acquisitions and restore the dividend indicate underlying management confidence. In all, with Ferguson’s relisting in the US still a catalyst for further possible upside, investors will see today's development as a positive.

Positives: 

• Robust financial position
• Resumed dividend payment

Negatives:

• Previous cautious accompanying management comments
• Reduced geographical diversification

The average rating of stock market analysts:

Buy