The report, by Australian research analyst David Errington, said:
"Although we have high regard for Bunnings management team, we believe buying a smaller-scale, home business in the UK (competing against a dominant operator in Kingfisher) will not likely deliver acceptable returns to shareholders. And if Britain exits the EU, we see this being a material risk to the Homebase business."
The report adds: "We believe the Homebase acquisition by Wesfarmers will dilute returns for shareholders, for the following reasons:
• Homebase is a smaller scale business. The major competitor in the UK (Kingfisher which is arguably the Bunnings equivalent in the UK, dominant, large scale, lowest price) – has 3x the sales of Homebase in the UK and nearly 7x the sales base in UK/Europe combined.
• Homebase sales per sqm is 25 per cent below its competition and its stores are on average one-third the size of an average Bunnings store.
Due to its lack of scale, Homebase is considered relatively high cost and higher priced as compared to its major competitors.
• Each Homebase store is being planned to be renovated and re-branded Bunnings – at an estimated cost of $3m-$4m per store (on 265 stores).
The report added:
"This is expected to increase the costs of the stores further. In addition, Wesfarmers management today in the Australian press highlighted that Homebase has increased wages in its stores, further increasing the costs of doing business.
"Homebase in the UK is a business that is the contra to Bunnings in Australia., It is a smaller-scale business with 25 per cent less sales per square meter than its competitors, and its margins at 1.5 per cent are materially beneath its competitors at around five per cent.
"Homebase is not the lowest cost and it is looking to increase costs in an already subscale business. This is the opposite strategy to what has made Bunnings successful in Australia.
"Bunnings has succeeded in being the lowest cost operator in Australia through its scale and low cost culture. This has enabled it to be the lowest priced competitor – enabling the retail virtual cycle. Homebase looks to be the opposite case to us."
"There is widespread discussion that Britain may exit the EU with a referendum planned on June 23 this year. There has been much public debate regarding the consequences if Britain were to exit, the most notable being the likely leaving of many non-British residents and a heavy fall in house prices.
If this were to happen, it would be a serious issue for Homebase as an already smaller scale, high cost business could come under further likely sales pressures."
Wesfarmers reports its latest quarterly sales figures on Thursday 21 April.