Anatomy of a Deal | How Herbert Smith Freehills bought Homebase

Herbert Smith Freehills was the law firm on the case as Homebase was sold to Australian company Wesfarmers for £340m (A$705m). 


In January last year, one of the biggest names in UK retail began the first stage of a transformation.

The DIY chain Homebase – if not exactly a beloved British brand then at least a familiar bank holiday destination for thousands of shoppers – had been struggling for some years. In an era when people have less free time and less skill, spending the weekend with a drill and several planks of wood has simply become less fashionable than it used to be in the DIY golden age of the 1980s and 90s. With shoppers diminishing in number and stores closing, Homebase was in dire need of a pick-me-up.

Homebase: an established brand in the UK - but a struggling one.
Homebase: an established brand in the UK – but a struggling one.

Fortunately for Homebase, on the other side of the world some Australians were looking at their own business and planning how they could expand internationally. That business was the conglomerate Wesfarmers, one of the largest listed companies in Australia with interests in multiple business sectors including mining, chemicals, insurance, fertilizers, leisure and retail.

One of the key assets in Wesfarmers’ considerable portfolio was the DIY chain Bunnings. And while Homebase was floundering, Bunnings was thriving. Though not a household name in the UK, the chain is an Antipodean institution, with hundreds of stores across Australia and New Zealand and famous for its ‘sausage sizzles’ – weekend barbecues that fundraise for local community groups.

Barbecues aside, Wesfarmers saw an opportunity in the UK DIY market. It thought its very different business model could work over here.

“The way Bunnings works isn’t the way Homebase works,” says Herbert Smith Freehills (HSF) partner Mark Bardell. “If you want to make a comparison with supermarkets, Bunnings takes the Lidl or Aldi approach while Homebase is more of a Sainsbury’s. The stores in Australia are known as Bunnings Warehouses and they look like a warehouse – metal racking, lots of products on the floor in piles and stacks – whereas Homebase tried to look like a department store with different branded sections. Bunnings believes that its business model, with a different style of retailing, would work in the UK. “

Bardell was the lead lawyer as Wesfarmers instructed Herbert Smith Freehills to explore the possibility of buying Homebase. It was a significant step for the business as it would be its first step into an overseas market outside Australia and New Zealand. If it could pull the deal off, it would immediately own the second-biggest hardware retailer in the UK (after B&Q), giving Wesfarmers a platform of over 250 stores to work with, allowing them to enter the market in one big bang rather than building up from scratch.

But there were challenges. Homebase was owned by Home Retail Group (HRG) – a company that also owned the Argos and the Habitat brands. And they weren’t selling.

“We did a lot of due diligence on a hostile basis before approaching Home Retail Group,” says Bardell. “It was about approaching them with an attractive price and a convincing deal structure.”

There was also the spectre of competition from other businesses. At the same time as Wesfarmers was doing its due diligence, HRG received a takeover approach from Sainsbury’s, while Steinhoff – the South African company that also owns the likes of Poundland and Bensons for Beds – also made a play. Both bids could have threatened Wesfarmers’ own ambitions.

“Speed of execution was absolutely key for this deal in particular,” says Joseph Dennis, the lead associate on the transaction.

“Normally when you’re bidding for a business like this, you broadly have three options. You can make a joint bid in conjunction with another company and then break it into pieces and distribute the constituent parts as agreed between the joint bidders. You can buy the whole thing and sell off the parts you don’t want. Or you can do what we did, which is bid for one part of the business and carve it out from the rest before acquiring it. ”

“To a certain extent, that’s the simplest option, but it’s actually the boldest as well, and it requires quick execution,” Dennis says. “If someone else made a bid for the whole of HRG, all bets would be off and we would have to step away and renegotiate with the new owner later. Given the speculation around potential bids for the HRG group, it was vital to get it over the line extremely quickly. We didn’t want to find ourselves in the position of having to negotiate to buy Homebase from a new owner.”

Bunnings’ ambitions to launch in the UK as soon as possible also meant that time was very much of the essence. Bunnings has now opened its first UK pilot store, converting the former Homebase store in St Albans, in February this year, only a year after signing the deal to acquire Homebase. 

A legal army

The gestation period of the deal was a long one. The Australian part of Herbert Smith Freehills had a relationship with Wesfarmers going back years, and the firm had been helping the business explore potential acquisitions for some time.

However, HSF was only formally instructed to begin due diligence in late 2015, leaving little breathing room to get the deal done. Fortunately, the core team of partner Bardell, senior associate Dennis, junior associate George Clarke and trainee Joanna Barry could call on the vast resources of Herbert Smith Freehills’ other teams and work together with Wesfarmers very experienced in-house team.

“It was one of those classic deals where you need a full service,” says Bardell. “We probably had over 100 people working on it at one point or another. Our colleagues in Belfast got through a large volume of the due diligence. We had the litigators and the TMT team involved, as well as financial services and regulatory because Homebase offers credit, which is a regulated activity. Then employment, IP for the branding and licensing, and obviously tax and real estate…”

Indeed, real estate was a vital factor in this deal. “For Bunnings it was all about the Homebase stores: would they be getting the numbers they thought they would in the right locations?” says Bardell. “We did a lot of work behind the scenes. Using our Belfast office we were able to look at the property portfolio weeks prior to making the approach.”

In addition to the small army of HSF lawyers, Bardell and his core team were also working closely with Wesfarmers’ in-house legal team in Australia. A first-seat trainee at the time, Joanna Barry was responsible for managing part of that due diligence exercise, liaising with the senior legal team at Wesfarmers and co-ordinating between all the different specialist teams. “We were almost doing 24-hour due diligence, she recalls. “We would work during the day, then at 11pm we would jump on a call to Perth and hand over to the Wesfarmers team, and they would take over while we were asleep.”

Making the right offer

With Home Retail Group not looking to sell, producing an attractive offer letter was critically important in order to persuade the target to have a conversation. Documents like these are “very heavily crafted” explains Bardell. “You want to talk about price, deliverability, execution, and rationale, and you also need to weight them appropriately. We got into good debates beforehand about the cultural differences between Australia and the UK in relation to the different points.”

The question of cash is obviously a big one but “it’s not just about price” says Bardell. “It’s very important you present yourselves as ready to go and do that deal. We also had to show we could execute the deal and do it quickly, anticipating any problems that might arise and proposing how we would address them.”

“It’s also appropriate for the board to consider what would happen to Homebase’s employees and safeguarding their employment rights, and the value to be paid to Home Retail Group and ultimately delivered to shareholders.”

“And then the question arises of what parts of the business you are leaving behind. In the case of this deal, it was Argos, a division that we believed was performing better than Homebase. We could make the case that Wesfarmers was assisting HRG in a way,” says Bardell. “Rather than taking the good bits and leaving them with a rump; our proposition was to leave HRG with a very viable standalone business. It involves a lot of empathy in trying to understand the position of the potential seller, in order to get it right.”

Much of this sounds more like a commercial letter rather than a legal one. “That’s right,” says Bardell. “It’s non-binding, and then the appendices contain the legal details. One of the things it’s important to understand is that you don’t get an instruction to go off to an ivory tower and draft an offer letter – it’s a collaborative exercise with the client’s team, which includes not just their own in-house lawyers, but also the corporate finance team and of course the board. We are part and parcel of that. That’s the most fun part – you’re part of a tight team. It was great meeting people with a Bunnings background: they have a particular way of thinking and really embraced us and made us part of their team.”

Making it happen

With the offer accepted, attention turned to the nitty-gritty of getting the deal over the line in time. A big complication was that the business related to the three brands within HRG – Homebase, Argos and Habitat – were not as distinct as they could have been. The Homebase business had to be extracted from within the HRG seller group in a complex pre- and post-sale reorganisation, and slotted correctly into the Wesfarmers Group. This gave rise to planning challenges as well as complex negotiations relating to transitional services and contractual tax risk sharing arrangements.

“For example, there were contracts that had been entered into between Argos and suppliers to the Homebase business, and certain key services were provided on a group wide basis across all three businesses says Dennis. “We had to make sure we got everything to do with Homebase and nothing to do with Argos.” That involved a pre-completion reorganisation of the target business to ensure there was full separation. “Each transaction in itself would not ordinarily be too challenging, but there were well over 70 different individual transactions that had to happen in a specific order to untangle the group, so that really kept the pressure on,” Dennis recalls.

As the deadline approached, the pressure intensified. HRG’s year-end was the end of February, so if the deal was to go through without a hitch Homebase would have to be off the books and the cash in its account by that point. A team from Wesfarmers came over from Australia and hired a serviced office in London to be closer to proceedings. “They were introduced to the joys of an English winter,” jokes Dennis. “They wore huge anoraks to all the meetings, even indoors!”

Completion eventually took place at Herbert Smith Freehills’ offices in Exchange Square on 27 February 2016. “I set out the documents in the signing room,” Barry remembers. “The Wesfarmers team were all very excited – they took photos of signing – it was a really historic day for them. It was a great moment for us to be part of.”

“When the news broke, it was the third most-read story on the BBC homepage at one point,” adds Barry. “That’s exactly the type of deal I wanted to be involved with. This was Wesfarmers’ landmark European acquisition and to be a part of that was something we were all very proud of.”

The future

The deal is done, but that’s never the end of the story. “From the perspective of Bunnings, completion is really day one rather than the last day of something,” says Bardell. They own a new UK business and are moving to run it independently so they are not reliant on the transitional services arrangements we agreed with the seller, HRG.” Over the course of 2016, the business has been gearing up to rebrand all of its UK stores from Homebase to Bunnings. The first store to officially become a Bunnings Warehouse was in St Albans this February. “The rebrand and moving to a new model of retailing involves a huge amount of work,” Bardell continues. “Then there’s day-to-day management of the stores, issues with suppliers and customers, putting in place new services to replace the transitional services – not to mention the ongoing new business of Bunnings such as ad campaigns.”

“We have kept in very close contact and hope to be able to continue our work with them into the future.”

Bunnings Warehouse