We believe Kingfisher's (KGF) agreement to sell 70% of the loss-making B&Q China to Wumei Holdings for £140 million represents one of the best possible outcomes following the strategic review of the business. Although we think the deal is a modest net positive for shareholders, it does not materially impact our £4.30 fair value estimate. We continue to believe Kingfisher has a narrow economic moat, with competitive advantages against online competition that retailers in other categories do not possess.
We were not surprised that the first action of new CEO Veronique Laury was to announce a new strategic plan for B&Q China following the announcement a year ago that the firm was looking for a local strategic partner. Several western retailers have exited China in recent years, including U.S. DIY retailer Home Depot and consumer electronics retailers Best Buy and Media Markt (owned by Metro AG), having failed to capitalize on the country's economic growth. Nevertheless, we remain optimistic on the long-term prospects of the DIY industry in China, so we are pleased that Kingfisher retains an economic interest in the business, although we think material growth and profitability remain many years away.
Despite the recent housing boom and the growth in disposable income of the middle class, DIY retailing has failed to take off in China. However, we believe it is possible that within a decade, if productivity increases no longer keep pace with wage inflation, that the labour pool could tighten in China, making DIY a relatively more attractive alternative to professional installation.
If this coincides with a slowdown in residential property construction and an aging of the housing stock, we believe these factors could be powerful driving forces for the DIY retailing industry. Until then, however, we believe it is prudent for Kingfisher to focus its management efforts and financial resources on the European housing market.
Next on Laury's agenda, we believe, will be the completion of the Mr Bricolage integration and possibly a square foot reduction program in the U.K. and/or France. Any of these factors could provide upside to recent business performance, which has been running below our normalized medium-term expectations. However, recent tax reforms in the U.K., which provide stamp duty relief on the first £125,000 of the value of the home, should be a positive for housing transactions and for Kingfisher's B&Q chain in the UK and Ireland. Although significant risk remains to the U.K. housing market, particularly for first-time buyers and in London, we believe the catalysts are in place for modest improvements in industry sales in the U.K. and in France.
