Thank you for standing by, welcome to the Woolworths Group Market Update. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Brad Banducci, Managing Director and CEO of Woolworths Group. Please go ahead.
Good morning, everyone. Before we start the call today, I would like to acknowledge the traditional custodians of the land on which we meet today, the Gadigal people of the Eora Nation. I'd like to pay my respects to elders past, present, and future. Thank you for joining us today at such short notice to discuss this morning's announcement. Joining me in the room this morning are Stephen Harrison, our Chief Financial Officer, and Bill Reid, our Chief Legal Officer. I will assume you all have had a chance to look through the materials, so we'll keep this brief so we can jump straight into questions. Today, we announced that we had entered into an agreement to acquire a 55% equity interest in Petspiration Group for a cash consideration of AUD 586 million.
This strategic partnership will provide entry to the fast-growing specialty pet segment, which will be highly complementary to our existing food and everyday needs offer, and over time can strengthen all aspects of our retail ecosystem. Petspiration is a leading Australian and New Zealand specialty pet food and accessories and service retailer, and includes brands such as Petstock, Best Friends Pets, and [audio distortion]. It is the number two player in a fragmented market segment with a store network of 276 stores and an established e-commerce presence and service offering, including vet, pet, grooming and doggy daycare. Approximately three-quarters of Petspiration's revenue comes from the Petstock retail business.
The group's investment in Petspiration will enhance our customer offer with its own wide range of pet products and services in-store and online, strengthen our loyalty program with the addition of 2.4 million Petspiration loyalty members, and lock opportunities for material value creation across both businesses. Shane and David Young and existing Petspiration shareholders will retain a 45% equity investment in the business. Shane and David founded the business in Ballarat almost 30 years ago, and Shane will continue as CEO and Dave as Managing Director, with Petspiration being run as a standalone business within Woolworths Group. We will continue to support Petspiration's growth through access to our retail capabilities in areas such as digital media and e-commerce, supply chain, and retail operations.
While Petspiration is already a strong, profitable business, areas such as retail media through Cartology, access to our data analytics capability through WooliesX, and harnessing the power of Everyday Rewards presents growth opportunities. Following the period of organic growth supplemented by regional acquisition, Petspiration's revenue for the last 12 months to September was AUD 979 million. EBITDA for the same period was approximately AUD 158 million. We expect medium-term growth rates in the sector to remain strong, but will likely moderate in the short term in a post-COVID environment. Assuming net debt including leases of AUD 670 million, the purchase price equates to an enterprise value of AUD 1.7 billion. On LTM September 2022 EBITDA basis, this equates to a multiple of 11 x.
The purchase price will be funded from the proceeds of our sale of 5.5% of Endeavour Group announced yesterday. We are confident that this transaction will deliver a strong return on investment for Woolworths Group shareholders, with the investment expected to deliver mid-teens IRR, with identified value creation opportunity to support strong earnings growth. The transaction remains subject to customary closing conditions, including pardon me, ACCC approval, with completion expected in mid-calendar 2023. I'll now hand back to the operator for questions. Can I ask that you limit it to one question per person, and we join the queue for any further questions.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Michael Simotas with Jefferies. Please go ahead.
Good morning. Can you talk a little bit about the earnings trajectory of the business that you've bought through COVID, given it's clearly a category that has benefited from COVID? You touched on it a little bit, but how can you be confident that the earnings base that you're buying is the sustainable underlying earnings base of the business in the category?
Yeah. Thank you, Michael. Great question. Firstly, if you look at this group, it's actually had an impressive growth trajectory on the top and the bottom line, going all the way back to way before COVID. It has a great growth story behind it. You know, it hasn't been a business talked about much, maybe because it's been held very privately and, outside of some access to third-party capital, it's really been funded by the founders. The growth story has been remarkably consistent over the last 10 years, and that continued, of course, through COVID. Very importantly to us, while it has this amazing impressive performance trajectory. If you look at third-party benchmarks, it's on the lower side of what you will see in specialty pets.
We can see material opportunities and, in fact, the founders have material opportunities to not only improve the top line, but continue to drive margin accretion. We spent a lot of time looking at all the right benchmarks, which actually in the sector you're lucky enough to be able to do, whether it's onshore, through Greencross and the look-through or offshore through PetSmart. We can see demonstrable opportunities to lift margin and as said, the founders have strong plans in place to continue to do that. One of the questions then we got in the media section was, are we sort of at a peak with through COVID pet? You know, everyone sort of in COVID getting a pet. We would say, and therefore, you're gonna see pet ownership trend down.
That is not apparent in any Western country that we've looked at. When you look at the benchmarks, pet ownership is not going down. It may have been pulled forward somewhat during COVID, but it's not going down. Importantly, actually, and in fact not talked nearly enough about, is pets are living a lot longer as nutrition is lifted, exercise regimes are lifted, and so on. You see a doubling actually in the age that pets tend to live on. Talking to dogs at the moment, but it is true on cats as well, just through better nutrition and better healthcare. You've got a number of other mega trends that are coming in the back end of this that I think are very important.
Okay. We shouldn't expect earnings to decline on an organic basis from the 12 months to September?
That's certainly not the Petspiration plan. That's certainly not the momentum we've seen in their business in the first quarter of this fiscal year. Certainly not based on the agreed set of opportunities that we can see between Petspiration and Woolworths Group.
Okay. Thank you.
Thank you. Your next question comes from Shaun Cousins with UBS. Please go ahead.
Thanks so much, Brad. Maybe just a question just on the broader changes you've made with the group. You've been fairly acquisitive over the last year or so in terms of building out this ecosystem, be it across MyDeal, Shopper, you had PFD before that. Other than Cartology, it's difficult for us to see, and conscious that COVID plays a role here, but difficult to see how that ecosystem is delivering. How will you convince the investment community that these incremental investments are not a distraction, but actually are sort of meaningful and actually delivering good returns for shareholders? In that it seems that you're kind of rebuilding somewhat of the retail conglomerate that Woolworths was some time ago.
Well-
Please.
Yeah, thanks. Thanks, Shaun. You know, I hear the narrative on the number of deals, but if you look at the value we've created through exiting businesses or selling down Endeavour or the demerger of Endeavour relative to the amount we propose to invest in new businesses, that is, there's a pretty large gap between the two. Let me just log that. Second point, just to be clear on, I'll come back to the point, of course, we need to be accountable to show the returns of each one, but I can come back to it.
There's quite a big difference between the deals we've done, which break into two groups, either finding great founders where we back their vision and we try to help them accelerate the growth or realization of that vision through leverage in our capabilities. Clearly, PFD Food Services Petstock, both founder-driven businesses with a strong history of performance. A lot of upsides still sitting in them, given they're a relatively small part of an important sector that we know something about and can add value to, but it's behind the founders that we really are doing it. You know, PFD Food Services Petstock really are a growth into adjacencies through supporting founders in their vision for what their business' full potential could look like.
That's very different to the other deals we've done, which are to strengthen the capabilities of our existing business. Quantium is one you didn't talk to, Shaun, but is in there as well, is really trying to drive our data and analytics capability up through the group, and we will come back to full year and we will talk to it specifically. But it is clearly materially changing, not only the performance of Woolworths, but actually the culture of Woolworths in terms of our leverage in our advanced analytics. Shopper, which was really to drive capability build for Cartology, through not only the screen network, but how to deal with agencies. Really an acceleration plan.
Same, same true on MyDeal of a very tough sector to understand if you're used to traditional retail of how do you build seller-driven businesses and how do you complement traditional retail business with the seller business. Those are the deals we're talking to. They all fit in different parts of the ecosystem. We will come back and show you how they're performing at the end of the year. None of them are designed to distract from our very strong food retail business or what I guess everyone talks about is our supermarket business. Shopper has gone into Cartology. Marketplace has been managed in partnership with BIG W, which is where the biggest short-term opportunity is. Quantium, we're managing through our advanced analytics team under Amitabh Mall. PFD is now being managed up through the Woolworths Food Company as a good logical powerful adjacency.
Petstock will become part of a broader group built around BIG W, which would include BIG W, MyDeal, and Petstock. We've informally called that group W Living. That would be led by within the group with Dan Hake, our new Managing Director of BIG W. We've been trying to be pretty deliberate and thoughtful. The Quantium, which we should come back and talk about are light of day. I do understand some of the questions and challenges.
We try not to distract anything we do inside the group, but to build around our vision for what we would need to be to be vibrant and successful in the twenty-first century, which is a highly relevant food and everyday needs retailer that sells first party, third party, physically, digitally, and meets the full needs of the customers in those segments. Which in the case of Petstock, you can't realistically do because a specialty pet is very different to the brands that can be sold, the services that can be provided, and most importantly, the customer's definition of mission. I do understand the tone, and I think it's the right question to keep asking us, and we will come back and show you a lot more transparency, and we're working on some background of how we wanna report the group, not the conglomerate.
Fantastic. Thanks, Brad. We look forward to the transparency. Thanks.
Improved transparency, if you don't mind me saying, we're on a journey of course, of evolving as we go.
Thank you. The next question comes from Tom Kierath with Barrenjoey. Please go ahead.
Morning, guys. Just wanted to check on the 45% that you don't own, what the put and call, I guess, arrangement is there. I couldn't see anything written there. Just would love to understand how that might work in the future.
Thanks, Tom. I'll let Steve get into the detail. I would just like to put a caveat that Dave and Shane Young are still pretty young guys. They started the business very young. You know, they have a lot of great plans, which we are co-investing to help them realize. The way we've designed all of the exit mechanics, which Steve will talk to, are designed around the fact they've got a great zest to continue to build this business. We have a great interest in them continuing to build it, and therefore, we needed to be very thoughtful on how we designed those mechanics. Over to you, Steve.
Thanks, Brad. So, Tom, the reason you haven't seen any reference to put and call is 'cause we don't have any. When we started the conversations with Shane and David, it was very much around they wanted an evergreen partnership, and they wanted a partner with Woolworths, given the capabilities they see that we have and that we can add to accelerate their growth. you know, we've consciously not put some calls into the structure, but rather created the mechanics that, you know, down the path some years, 'cause as Brad said, you know, Shane and David are very keen to be involved in the business for a number of years, and we're keen to partner with them, you know, for many years to come.
We've got the appropriate mechanisms at that point in time. We would not expect any change in that shareholding in the medium term.
Okay. Cool. Thanks, guys.
Thank you. Your next question comes from Bryan Raymond with JP Morgan. Please go ahead.
Hi guys. Just on the recent acquisitions that the business you acquired made, Best Friends r etail, Pet City. Just wanting to understand. It looks those a bit better. It looks like it's about 20% of enterprise value that sits in those based on what they paid for them. I'm just interested in how you see them in terms of contributions to the AUD 158 million of EBITDA, and also how they're being integrated. Do you see any risks or opportunities within those recent acquisitions? Thanks.
Yeah. Thanks, Bryan. I mean, what you're seeing is Petstock really going national. It's had lots of gaps in its national network, you've seen a business nationalize really at a broad level. That's really what's happening. The plan of record is it would all become Petstock retail because of the fact you're filling in gaps in, you know, in major geographies. They would all become Petstock stores, although there are three formats inside Petstock, which I think are very important. They're quite unique. They are the city or CBD stores, the sort of more regional stores and then the country stores. The rebranding is underway at the moment.
The same loyalty program then gets rolled out across all of them. In fact, the way it's working in sequence, the loyalty program is rolled out first, and then the site is rebranded second, and the rebranding of the loyalty program will be Petspiration as versus Petstock. A very organized structure process of nationalizing the business. Steve can talk to the numbers. You know, the synergies that we expect that Petspiration would generate through the growth and the integration aren't in those LTM numbers, and therefore they're somewhat in the multiple.
If you looked at it, you've seen a multiple reflecting the synergies we would expect to see going forward of actually nationalizing the platform, bringing all of these businesses up to Petstock operating levels, giving all of these businesses access to the Petstock very strong private brands, and most importantly of all, making them all part of the Petstock or Petspiration loyalty program.
Just to build on it. They're just under 20% of earnings, Bryan, if that gives you some indication. As Brad said, with synergy opportunities ahead of us.
Right. Just to confirm then? They're, are they, the earnings they were generating sort of under earning versus the Petstock Group, given you've acquired those businesses, or they acquired them and you're converting to Petstock, are you really just buying a footprint? You're not buying the brands. Are you buying the people, the inventory?
Yeah.
Just trying to work out.
Yeah, exactly, Bryan. I mean, we're talking on behalf of the Petstock management team, so, with that as the caveat, hopefully in due course you'll get to meet them. They are sizable, some strong capabilities and really learning how they wanna drive their business. They expect to apply these to these businesses which in a performance sense, underperform relative to Petstock, also, recent experience will show that a rebranding to Petstock, gives a natural balance as people really resonate with that brand.
That said, from Dave's perspective or Shane's perspective in speaking to him, all of them seem to have a really good in-store culture in terms of customer engagement, and we have visited actually 88 of the total stores in the group, and we can validate that. You know, good cultural alignment, but a ability to apply, you know, improved capabilities and very importantly, you know, access to own brands, which is really hard in the space because they tend to be specialty own brands. Very hard therefore to develop and make with the right efficacy and scale up.
Okay, great. Thanks.
Thank you. Your next question comes from Adrian Lemme with Citi. Please go ahead.
Good afternoon, Brad and Stephen and team. Just a follow-up question to Shaun's. Since the business is being separately run, are we right to expect that we'll get visibility on the results of the business, or will it be grouped and reported within, say, the W Living segment, please?
Adrian, that's something that we'll work through, you know, post-completion of the transaction, but it is something that we're considering. I mean, obviously some of that segment disclosure is, you know, driven by accounting standards, we'll just work through that at the appropriate time.
No worries. Thank you.
Thank you. Your next question comes from Grant Saligari with Credit Suisse. Please go ahead.
Good morning. Brad, could you talk to what you think the competitive advantages of the Petstock business itself are vis-à-vis other competitors in that segment, of which there are numerous, and I guess also what, if any, synergies you see with the rest of the Woolworths business as opposed to anything that could be sort of commercially obtained by Petstock at arm's length?
Yeah. Thanks, Grant. I mean, these are very good and they're, and then what you guys all cover the business, I think we all would agree that Greencross and Petbarn is a very strong, high-performing, business. It's good to have a competitor like that, and we can see where the performance gaps are for Petstock relative to Petbarn, or Petspiration relative to Greencross. It gives us some really good foundation markers of the kinds of things that can be done with these businesses, and hats off to the Greencross team. There's also, I think, very good learnings you can look at out of the U.S. and the transformation that's happening with PetSmart I think is very interesting.
The challenges that have set in with Chewy I think are very instructive as well. There are lots of learnings that we think we can apply back into Petspiration together with the founders. What we liked about this business, Grant, was we're very focused on culture. Fundamentally, it's got a great culture. It's got an entrepreneurial culture in itself. The in-store culture with the team is very highly engaged. People love working in this business. They love working with pets. It's a very authentic culture that's been built up, you know, over 30 years that's very, very real. We like the culture, we can see all the opportunities, and importantly, we agree with the founders on all of those opportunities.
What we can do inside Woolworths Group is help them, hopefully, support them to execute on the opportunities they have. In no particular order, if I can, first. Sorry, background noise there. If someone doesn't mind turning that down. I think the Petstock, Petspiration team would say supply chain has not been one of their core capabilities. There's a lot of work that they think that they need an opportunity and help they need in supply chain, which we would, you know, we feel is increasingly a capability we can help them with. We see that as important. For those of you who remember in history, that was actually one of the first opportunities that we undertook with Dan Murphy's.
It was to actually go from DSD through to a central warehouse model, and actually was one of the key accelerations of Dan's. We do see some modest analogies between these two groups. There are many towns that there is not a Petstock. We have a very good property team. We can help them figure out where to go in an organic sense. There are many opportunities, and in fact, you know, a Petstock can often sit very comfortably with a BIG W or a Woolworths supermarket. You know, we can see how we can help them accelerate that. We do have a format and network team that can not only help there, but just in the format itself, one of the things we really like about the founders, they do great things.
They're very intuitive, they're open to a little bit of science. You know, science and art, where there's magic, and we look forward to engaging on that. They would acknowledge they're very early in their digital journey. They have a very material e-commerce business, funny enough, this is to my surprise, e-commerce in pets is more economically challenged than it is in food. This was not something I would have expected. We do intend to lean in and make sure we can help them digitally and in just in the underlying economic model for e-commerce, to change that. They've got an AUD 90 million e-commerce business, and I think acknowledge that it's negative in aggregate, EBIT performance.
You know, we do see an opportunity to, we think, help them there. Commodity sourcing, anything we can do on the back end, we think will be good to them, we do subscribe to the brands they're building and the way that they're building that. A lot of things. They're not really analytical. I think, you know, they've got amazing loyalty programs. You have a 2.4 million member loyalty business. The way they've built it is nothing short of extraordinary. There probably can be a little bit of personalization or data science that we can apply there.
If you look at them at counterfactual, we do know that in their 2.4 million database, they're gonna be a lot of pet families that perhaps don't shop at Woolies, and we'd like to give them the opportunity to do that and hopefully we can see that, you know, that happen. By simple maths, you know, it's gotta be well over 1 million of their core customers are not core customers of our Everyday Rewards program. We need to be very thoughtful and careful with our privacy restrictions, but we can see how they can help us. We see how Everyday Rewards, you know, can help them. That'll be the key value accretion part to the rest of the group. Hopefully that gives you a sense.
We can just see opportunities all across the spectrum. We're getting better at learning how to apply those capabilities. I think, you know, with the merger with Endeavour, we've had to work very hard to then reformat our capabilities to service Endeavour. We've had to do likewise for PFD. I think it's kind of good to be the third in the rank, I would say for Petstock, 'cause we can apply the learnings or things that haven't worked as well to make sure we do that in the right cadence sense. Hopefully that gives you a sense of the scope. I missed something. There'll be many other small ones that we're getting excited about.
No, I mean, the only other one would be Cartology, Brad.
Yeah, the media side.
Obviously the media side.
Yeah.
But I think you've covered all the others.
Yeah, we do get very excited by retail media in pet, just given the nature of the category and the importance of the category and just the nature of the supply base to the category. We also like for the fact, by the way, the fact it's Australia and New Zealand, it's really good to be in that camp. You know, we see whatever opportunities we see in Australia, we see, you know, similar opportunities in New Zealand.
Okay. Thank you.
Thank you. Your next question comes from David Errington with Bank of America. Please go ahead.
Afternoon, Brad. Can I get straight to the chase? What you've paid today, you've only told us 11x EBITDA, and effectively that assumes net debt, including leases and whatnot. If I do a calculation roughly, I mean, please confirm if I'm wrong or right, but you're paying roughly about 25x-30x PE for this business, bits and pieces of a business, 55% of the business that's gonna be run outside of Woolies. Now, your current stock price, you're probably on a PE of 22, 23, and with all the franking credits that you've got, you could probably buy back your own stock at about 18x. Can you explain to the shareholders why doing these bits-and-piece acquisitions is actually value accretive for shareholders as opposed to buying back your own stock, please?
Thanks, David, and I'll come back and I hope to confirm you're a pet owner, so that we can meet more of your needs as well. Firstly, there are pathways to full ownership in this business as there are in PFD and any other business we've been involved in. We just would like to be very thoughtful and slow in that process, given the value creation potential of the founders. Secondly, you have very few opportunities, which we have been lucky enough to do, to be able to co-invest and have the opportunity to own the number one or two player in a really important segment that's adjacent to everything else we're doing. We've had that opportunity with PFD in food services, with the Smith family. A very close, arguably neck and neck with Bravest.
We're having the same opportunity in Petspiration, which is behind Greencross, but as I say, lots of reasons to be excited by the fact that it is. You don't get many opportunities like this in these adjacencies to have the quality of assets and the partnerships that we can build with pathways to ownership. In the future, as we build the right capabilities, which I would argue in some of the things we had to exit, we underestimated and thought we could build them through just using internal teams, which is one of the great learnings I think we would all agree on Masters. We think that this just strengthens the group. This is the seventh biggest loyalty program in the country, David.
I think we would argue, and we'll talk about it out fully, the critical importance of loyalty, to have another 2.4 million members. Admittedly, there will be overlap, but higher relevancy into that. We think it strengthens our group in ways that are can't calculate. The number you're seeing is a backward-looking PE ratio, EBITDA multiple. It's a trading multiple, and the business has just done a series of very bold moves that has material momentum. Of course, when you start looking at the forward multiple at, hopefully, and we'll have to prove this to you, is very different to this. We see it as key to building the Woolworths of the future. It's not about a 55% shareholding. It will be managed as a discrete business within Woolworths Group.
It's not a business that we'll go and say hello to, once a quarter down in Ballarat, although a very nice regional town I would strongly recommend visiting. Steve, do you wanna talk to the specifics around the PEs?
Yeah. I would only... The only thought I would have, Brad, is the one, the point you made. You know, a PE and, you know, EV, EBITDA multiple is a point-in-time estimate based on where it is today. David, we look at this on the forward trajectory of the business and the growth potential that we think this business has, both its organic growth opportunities and the value creation opportunities that we see in front of us and, you know, have actually talked a lot to the young family about on Grant's last question. You know, moving forward, we're very confident this will be accretive to earnings, that it will deliver strong shareholder returns, well above our cost of capital.
It's through those lenses that we assess the, you know, when we have available capital, what do we do with it? Do we either pay down debt, do we return it to shareholders, or do we invest it in growth opportunities? It's through that lens that we made this investment. You know, conscious that we need to meet those return expectations of our shareholders.
Yeah, just the confidence ancillary isn't as great as from the shareholders. The feedback I get is that they prefer you to buy back stock using your franking credits, 'cause then that's locked in, rather than you pursuing this ancillary, buying these bits-and-piece businesses for, you know, in here and AUD 600 million there. That's the feedback that I receive, and I'm just interested to hear what your view is, so as that you've got the shareholders on the call to justify why you're doing that rather than buying shares back. That's all. That's the fee. That, that's your platform to do it.
Yeah. We've just got the chance to co-invest with the second strongest player in specialty pet, which is at least an AUD 10 billion, if not an AUD 20 billion segment. It's just like we've got the opportunity to do with PFD in an AUD 20 billion segment. There are not many AUD 20 billion segments that we can invest in alongside proven entrepreneurs in Australia. Actually, I don't know how many others actually are out there. You know, those are the opportunities. Those opportunities, if well executed, these opportunities will make for a stronger Woolworths Group. Our most successful venture we've done this with, as you would know, is with BMG, and actually the original acquisition of Dan Murphy's back in 1998. There are very few differences in what we're trying to do here to that actually.
That was driven by Tony Leon, who's famous as business as the first iteration on wilderness. Very similar in our view to, been sitting there talking to the Youngs and where the business is in the journey. We don't see it as different. We see it as a different segment that sits more comfortably with what we're trying to do in our second century, which is around health, wellness, and families. It's got a lot of analogs back to us.
Yeah. No, good answer. Thanks, Brad.
Thank you. Your next question comes from Ben Gilbert with Jarden. Please go ahead.
Afternoon, Brad and team. Look, just following on from a question a couple ago, just around the synergies and how you think about them. I appreciate it's gonna be run as a separate business, but will you be combining things like buying from the get-go and pulling a bunch of these together and also things like insurance, will that be able to be cross-sold into this business pretty quickly as well?
Yeah. Thanks, Ben. Really good question. You know, we will take our time in terms of how we, you know, nestle Petspiration as part of our group. We, you know, we're gonna hasten very slowly on that. One of the key things we will look to engage, and we've already communicated with our team, is that our PetCulture, which was our specialty startup business, which is our only asset in the space, we would expect that to integrate into the space to strengthen the capabilities of the group. We do expect to see that, but that's the one major thing we would expect to see in the short term. In terms of insurance, you raised a very good point.
Actually, we are, interestingly enough, I wasn't aware of this until we started looking at the issue. We are the second-biggest pet insurance company in Australia today, through Woolworths Pet Insurance. We do intend to be rebranding Woolworths Pet Insurance as Everyday Pet Insurance, and we will be engaging with Petspiration on our opportunity to extend this across their group as well, and in particular, give their members of their loyalty program the option to hopefully sign into the best value pet insurance program in the country. We are hopeful that that will take place, and that's one of the conversations and pieces of planning we'll do in the next few months. Those are the two big things we're looking at in the short term. The rest will be to hasten slowly.
They've got great plans. It's how we help them deliver on their plans. It's sort of less synergy and value assurance that we, the game we're in in the next 12-24 months. How do we help them deliver what they need to do? What are the capabilities do they need? How do we support it is really the orientation for the next part.
That's great. Thanks.
Thank you. Your next question comes from Lisa Deng with Goldman Sachs. Please go ahead.
Hi. Just a question on this mid-teens IRR to justify the purchase. We've kind of touched on it through the call today, but can we just sort of wrap it up in terms of the key assumptions that we would need to arrive to that mid-teens IRR? Is it, you know, the 5.6% industry growth, we will be gaining market share? Is it the margin improvement? Is it, you know, including some of the synergies that we had talked about? What are the key assumptions and capital deployment as well, any additional capital deployment in order to sustain the IRR target that we've talked about today?
Thanks, Lisa. Steve, if you don't mind taking this one.
Yeah, yeah. Happy to. Lisa, I think you've referenced a number of the things that we think will ultimately drive earnings growth in this business, which is what will justify, you know, the shareholder returns and the IRR for us. You know, we think the sector has attractive growth profile, there's just natural organic growth that will come with sector growth. I think Brad referenced this earlier, we do see greenfield opportunities, as do the Youngs, in terms of, you know, rolling out the format, you know, both in, you know, new locations and, you know, potentially down the track, you know, co-location, you know, with the group. We do see a lot of synergies, I think we've, you know, spent a lot of time talking about what those value creation opportunities are.
I should note, some of those value creation opportunities will, you know, be realized in the Petspiration Group, and some of them will be realized in Woolworths. Collectively, you know, they form part of our in-investment appraisal. Ultimately, you look at the EBITDA margins of this business relative to, you know, both domestic and international peers. There's clearly a margin opportunity, and there's a range of things that we think that we can help the business with. There's actually already a number of things that they've already been doing within their organization. You know, Brad talked about the development. You know, if Shane and David were here, they'd be talking about the three years they've spent getting, you know, their own brand foods right.
You know, the Globe or the Billy's Bowl brands, which they're very proud of. They've been very clear that they'll only launch those brands when the quality is, you know, what it needs to be. We do see, you know, margin accretion opportunities across the business, you know, through the things that we can contribute, as well as, you know, through that e-expansion of, you know, exclusive and own sourced products. You know, we see a whole range of opportunities. There will be some capital deployment in the future, particularly around supply chain. In fact, they've got some in-flight projects that will require some capital over the next couple of years in particular.
And obviously, with, you know, greenfield and new store opportunities, you know, does come some capital. You know, probably worth me, just while we're talking about IRRs, there's a couple of things that, you know, I suspect may be on the minds of some of the people on the call in terms of information we didn't put into the release. That these are worth just clarifying. You know, D&A for the business, you know, both lease and asset D&A is about AUD 50 million. You know, if you were to, you know, do a pre-AASB 16 multiple, and I saw this, you know, some commentary out of the markets, but it's around a 12.5 on a pre-AASB 16 and 11 on a post.
We think that, you know, sustaining or maintenance capital is sort of in that AUD 20 million-AUD 25 million capital range. You know, the amount of investment we put into growth capital will obviously come down to what are those opportunities, and the time horizons for those.
Got it. Thank you.
Thank you. Your next question comes from Ross Curran with Macquarie. Please go ahead.
Hi, team. Sorry, can I just come back to PetCulture? How does this business interact with that business? That's a JV as well, right? And they're selling similar products online. Does this transaction trigger any buyout of the remaining PetCulture business?
We're gonna work through that in parallel, Ross. You know, that's a different... You know, we will certainly engage in with PetSure or Hollard Group on how we now think about the joint venture in the context of what we've just done. What we've learned through PetCulture is we've learned a lot about the segment, which is, you know, was a very valuable platform started two years ago, two and a half years ago in the journey. It's amazing how the world's changed. Can I just say, if I could use this as the opportunity. You know, five years ago, the conversation around the Chewys of this world and how we were gonna respond and what were we gonna do, our response was PetCulture.
What we found in PetCulture is we've done some things really well, and we'd love those capabilities to be leveraged by Petstock. Our auto-ship type capabilities have been very, very good. Our ability to personalize known pets and so on is also a great capability. We found that a pure play food retailer is just as hard to operate as a pure play pet food retailer, as a pure play food retailer. They're very hard businesses. The future for us, and we're very clear on this, is a combination of stores and an overlay of e-commerce on those stores, and that's what we found. It's one of the reasons we started to engage with Petstock. It's how you bring those two together.
If you look at what's going on in the U.S., you'll see the same trend lines taking place right now. Really good learning experience. We found that you're not gonna get there in a pure play scale, but it gave us enough learnings to be able to build it into these conversations. Now we're gonna engage with our partners in Hollard to make sure that we get something out of the partnership between the three organizations that works for all three.
Just wondering, does that hint to more capital you need to invest into PetCulture from here?
I wouldn't. It's not material in the context of what we're doing here. No, Ross, I'd just call that we'd already made our investment. It was how hard we drive the growth of it. Obviously we're gonna, you know, rethink that in the context of Petstock.
Great. Thank you very much.
Thank you. Your next question comes from Phil Kimber with E&P. Please go ahead.
Hey, guys. I was just gonna follow up on the leases. What's the, you know, the average tenure of the leases? I think that you said there's AUD 380 million of lease liability. Is there a material finance component to the leases? You gave us the D&A, but what about the finance lease part?
Oh, Phil, the tenures on the le-.
The interest expense.
Yeah, I don't have the interest expense number to hand. The lease tenures are going to vary. I mean, in some cases they're short-term leases with, you know, five years. In others, they've got them up to 15. It is something that, you know, we'll work through with the Young family. You know, we spent a lot of time, you know, with our own property team looking at what are the appropriate tenures. I think on average, most of them would be at the shorter end of that range.
It maybe just a useless fact to share, but Home Consortium is the biggest landlord for Petstock, which is, you know, the world moves in strange ways. It sort of does fit in those more big box type of property environments, more industrial park type environments. It's a very different location. We will try and help them, I think, as we've agreed on getting the right lease standardization. Interesting to find one of our partners through the exit of Masters is now our biggest landlord in the context of Petstock.
Great. Thank you.
Thank you. Your next question comes from Craig Woolford with MST Marquee. Please go ahead.
Afternoon, Brad. Yeah, for sure most of the questions have been answered. Just with respect to this IRR and probably more the multiple that has been paid, just to be clear there, IRR is what you expect to achieve midterm, including synergy, if you get to a mid IRR. It just seems a little bit unders where, you know, any margin for error for safety given how strong the pet care market has been. Maybe my question, there was a transaction for Petstock, not Petspiration, that looked to be done at about 10x on a pre-AASB 16 basis about 12 months ago. It was only for 11%. just wondering how you derived the most suitable multiple for the transaction here.
Thanks, Craig.
I mean, Craig, a couple of things in there. You know, with forward projections for any business, you look at a range of scenarios, right? We've got a, you know, I think what would be our base case that we took to our board, but we also have a view on what we think the full potential is. You know, what we're quoting there is our base case. We think actually the full potential opportunity is greater than that. In terms of the multiple, you know, as you'd know, in any M&A transaction, it's a negotiation between two parties. You know, the quoting as we talked about earlier, of a point-in-time multiple is exactly that.
You know, it's based on, you know, the LTM to, you know, to September is what we're quoting. You know, what we think about the forward trajectory and growth profile is ultimately what will determine the returns. You know, I think, you know, you're referencing, I think there's some commentary in the market about one of the investors who has exited as part of this transaction. They did enter in at a lower multiple than we paid. They've, you know, I think to their credit, got a good return as they got in before a lot of the growth profile of the business.
You know, there's been a quite a rapid acceleration in both, you know, new store, rollout, as well as, the acquisitions of the Pet City and Best Friends Pets groups. They have, got the benefit of that growth profile. You know, overall, I think the, you know, the question for us is, you know, ultimately, are we, confident that we can deliver strong shareholder returns from this investment? You know, we wouldn't be doing it if we didn't have that confidence. Hopefully that addresses your question.
Yeah. Thanks, Brad.
Thank you. Your next question comes from Scott Ryall with Rimor Equity Research. Please go ahead.
Hi. Thanks very much. I just wanna talk about slide six, if that's okay. You put it quite a, quite a good way, and I'm hoping that the way I ask this question will help Brad answer in a succinct manner. The two pillars on the right-hand side, retail platforms, loyalty, and personalization, you could presumably do through a contract, much the same as what you did with Endeavour on the merger. Did the discussions start with those and then you actually, as you got into the discussions with them about purchasing a stake, it became clear that you could actually do, you know, exactly what Brad's pointed out that you've done already at Dan Murphy's, which is, the retail capabilities, store network, supply chain, and e-commerce.
There was a, an opportunity for Woolworths to actually add value through ownership. Is that a reasonable way of thinking about, I guess, the structure of some of the benefits and also some of the discussions that took place, please?
So-
I guess what I'm trying to get to here is the specific value that Woolworths bring to this business as opposed to just it's a really attractive segment of the market to be investing in.
Scott, as I said 18 months ago, when we started to see the limitations of a pure play online specialty pet business, but we could see the benefits inside the group. To be honest, I asked a lot of people, including suppliers, who they thought was the most interesting partner in the segment, all roads led me to Ballarat. We started with culture alignment, and whether we could actually work together, and then we tried to figure out whether there was enough value on the table for both parties to do that. You know, the real issue for us was the plan that Shane and Dave showed us was the plan that we fully subscribed to. Everything you see on this page was how we were hoping we could contribute to them executing the plan.
Using our retail platforms, which are increasingly very compelling, just to get a fee for service is not the name of the game for us. There's not enough leverage in it, and that's where we're at risk of distracting ourselves from the main game of driving value inside our existing businesses. It was very much in that sort of lineal sequence. We could see the value in being in the segment. We could see that we weren't gonna get there through, just an online disruption, which sounds very 2022, disagree, but, four years ago, that was the, that was the issue. Then we felt really strong alignment with, a group of people.
The timing became when they were comfortable actually, and it became a question of when it worked for them, and this was the moment it worked for them, and that's why we're here today.
Okay. Thank you.
Thank you. Your next question comes from Lisa Deng with Goldman Sachs. Please go ahead.
Hi. Just a really quick follow-up. In terms of the EPS accretion, I know in the longer term we've definitely planned for, you know, good EPS accretion, but in the near term, just summarizing everything that we've talked about today, you know, it would be minimal EPS accretion within the next call it one to two years post-transaction. Is that the way that we should think about it?
Lisa, I think there'll be some EPS accretion. You know, we've not quoted the number, but we hope that we've given you enough information in terms of the disclosures to date. You should be able to calculate that.
Okay. Thanks.
Thank you. Your next question comes from Michael Simotas with Jefferies. Please go ahead.
Thanks for taking a follow-up. I just wanted to better understand the timing of the sell-down of the 5.5% stake in Endeavour, given they'll report a result in February, and it's not a particularly good time of the year for liquidity in markets. It doesn't look like you would've needed the cash to settle this transaction, given it's not likely to settle until midway through next calendar year. Just wanted to understand the sense of urgency there.
Michael, you had the first question, and now you're having the last question. Look,
Just the way I like it.
Look, we always felt that the bundling the two together where there was a legitimate and logical connection between us recycling our investment out of Endeavour into an investment in Petspiration. The date we sold out of Endeavour was never gonna be a convenient date in truth. We didn't let, you know, the timing disrupt that thinking of the logic of what we were trying to do, which was reduce our exposure to one segment and invest in what we thought was a key segment for the group. It fitted together as a narrative. As I say, with the size of block we had, to be honest, every time the results, everyone's watching us to see whether we're gonna do something.
Timing, we decided we couldn't let timing be the driver of this, but the logic of what was the right thing to do. Recognizing Endeavour's a key partner for ours, and we had to do the right thing by them in terms of how we managed this through as well. Don't know if there's anything you'd wanna add, Steve.
No, I don't think so. I mean, ultimately, it's this, it's this strategy of, capital recycling from one asset into another. Yeah, that symmetry and alignment of doing it concurrently we felt was appropriate rather than creating, you know, uncertainty and overhang of what might we do in the future.
Okay. All right. Thank you.
Yeah, once we announced it, everyone was gonna start worrying about that as well, Michael, was one of the considerations actually to this, to this point.
Which was the logic of going sort of 24, 48 hours ahead. Yeah.
Thank you.
Thank you, everyone. I'm conscious of the hour. We're all invested in sort of getting out and shopping inside our various stores, in particular in our food stores. Eight days to Christmas, please shop us. We would like the sales. And hopefully you'll see a fabulous team, highly motivated, and good stock flow and some amazing deals. Look forward to speaking to you all soon.
That does conclude our conference for today. Thank you for participating. You may now disconnect.