Barloworld to shut Middle East logistics business
Barloworld, the listed distribution group, has given notice of its possible exit from logistics if its business failed to improve its return on invested capital.
The group has decided to exit its logistics business in the Middle East and to dispose of its Iberia equipment business.
Barloworld chief executive Dominic Sewela announced that the group had completed its comprehensive strategic review to fix and optimise existing businesses and the future strategy of the group had been approved by its board and was being implemented. He further said that the turnaround of the logistics business was important and highlighted its poor return on investment capital compared to the group’s equipment business in Russia.
The logistics division achieved only a 2.5% return on ZAR2.4bn in investment capital in the year to September, compared with the return of 18.4% achieved by the equipment business in Russia on ZAR2.6bn in average invested capital in the year. The return of the logistics business was also “way below” the group’s weighted average cost of capital of 12.3%.
Sewela said that, by the end of the group’s half year, they should be able to measure where the logistics business was and in September next year be able to take “a final decision on whether we stay in that business or we exit it”. He stressed the return on equity was one of the key issues they focused on with the strategic review.
The group overall return on equity from continuing operations improved 16% to 10.5% in the year to September from 9.3% in the previous year. But Sewela said this was still far off the group hurdle of 15%. He added that a large portion of Barloworld’s investment capital lay in its equipment Southern Africa and Russia divisions. He said that equipment Southern Africa improved its return on investment capital to 12.8% from 7.8% in the previous year, but the Russian equipment business achieved a return of 18%.
However, Sewela added that the equipment Southern Africa division was at the bottom of the cycle and, looking at the opportunities available, believed its return on investment capital would get closer to the group’s Russian operations or even better.
Sewela believed the group would be exiting the Middle East logistic business in the first quarter of the next calendar year and the equipment business in Iberia by the middle of next year. He wanted to sell the Iberia equipment business at a premium to its net asset value of ZAR2.8bn.
Sewela confirmed that the group had entered into exclusive negotiations with one buyer about the sale of this business and would conclude discussions by the end of this year about pricing and due diligence.