UPDATE 4-Lowe's taps Australia growth with Woolworths venture

Published: 24 Aug 2009 19:57:26 PST

* Lowe's to open home improvement stores with Woolworths

* Venture includes A$13.50/share bid for Danks Holdings

* Lowe's will own one-third of the new chain

* Woolworths shares up 3 pct, rival Wesfarmers tumbles (Adds Lowe's, Woolworths executive comments)

SAN FRANCISCO/MELBOURNE, Aug 24 - Lowe's Companies Inc, the No. 2 U.S. home improvement chain, is making its first foray outside North America through a joint venture with Woolworths Ltd, Australia's largest retailer.

Lowe's, like bigger rival Home Depot Inc, has been badly hit by the U.S. housing downturn, with sales slumping as homebuilders and consumers put off housing-related purchases. Australian homeowners, in contrast, are fixing up their houses rather than buying property.

Australia is also one of the few advanced economies to have dodged a recession, with the central bank predicting 0.5 percent growth in 2009, increasing to 2.25 percent next year.

"Economic conditions in Australia over the last 25 years have been nothing short of spectacular. And over the next several years it looks like the forecast is even stronger yet," said Don Stallings, president of Lowe's Canada.

"We feel like with these new store openings we'll be well positioned to start to capitalise on the recovering economy," he said, explaining why Lowe's was drawn to Australia.

The venture will also enable Woolworths to expand into Australia's $20 billion hardware market, giving it a new leg of growth as the pace of growth in its core supermarkets arm slows.

The joint venture includes an A$88 million ($73.6 million) takeover offer for Australia's second-largest hardware distributor, Danks Holdings Ltd, at A$13.50 per share, 65 percent above its last trade.

Under the deal, Lowe's will own one-third of the new home improvement chain, whose first new store is due to open in fiscal 2011. The companies did not say how much they would spend to set up more than 150 large-format stores in the next five years.

As of January, Lowe's operated 1,638 stores in the United States and 11 stores in Canada. The company said then it planned to open 60-70 stores in fiscal 2009, including in Canada and its first-ever stores in Monterrey, Mexico.

OPPORTUNITY

Lowe's, whose shares have fallen nearly 17 percent in the past year, is the second big U.S. retailer to expand into Australia's tightly held market this year, after Costco, whose warehouses sell everything from groceries to diamond rings.

Woolworths has more than 3,000 retail outlets in Australia and posted fiscal 2009 revenue of $37 billion (A$49.4 billion). The company has no relation to the now-shuttered Woolworth's drugstore chain that formerly operated in the United States.

In Australia, its brands include the country's biggest supermarket chain, Woolworths, BIG W discount department stores and Dick Smith consumer electronics stores.

With the venture, Woolworths will face off again with rival Wesfarmers Ltd, which owns the market leading Bunnings hardware chain as well as Coles, Woolworths' main competitor in supermarkets.

Wesfarmers Managing Director Richard Goyder said last month he would welcome new competition, but investors saw the joint venture as a threat and knocked Wesfarmers shares down as much as 10 percent. In contrast, Woolworths' shares rose just over 3 percent to A$28.90 -- its highest in more than nine months.

"Clearly this is not good for Wesfarmers, as such a high-powered, well-organised and experienced combination of Woolworths, Danks and Lowe's is attacking them on that front," said Martin Duncan, analyst at Fortis Investment Partners.

WISE MOVE FOR WOOLWORTHS?

Analysts and investors have been divided over the wisdom of Woolworths expanding into hardware, a prospect that had prompted much speculation over the past year.

"It's a fantastic deal for Woolworths. It's been amazingly well thought out and executed. They're going in there with a partner which has a great format in the U.S.," said Duncan.

Lowe's format appeals more to women, clearly differentiating it from Bunnings' warehouses, which appeal more to men, he said.

The deal also makes sense as Danks, with a 4 percent market share against Bunnings' 18 percent share, will give Woolworths instant critical mass in the sector and relationships with hardware and plumbing suppliers.

Woolworths Chief Executive Michael Luscombe played down some analysts' concerns that it will be difficult for the group to secure sites for large stores, saying some local governments had already promised they would help speed approvals.

Danks said it recommended shareholders accept the offer in the absence of a better bid.

Shares of Lowe's closed down 2 percent in New York and did not move after hours. ($1=1.195 Australian Dollar)