Woolworths goes shopping

Supermarket retailer expected to bid US$3 billion for Hong Kong grocer

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Supermarket retailing giant Woolworths (ASX: WOW) is reported to be in the final stages of submitting a bid of around US$2.8 billion for Hong Kong's second-largest grocery chain, ParknShop.

According to the Australian Financial Review (AFR), Woolworths is expected to pay around 15-16 times earnings before interest, tax, depreciation and amortisation (EBITDA), which would equate to a sale price of around US$3 billion. While the price is small compared to Woolworths' market cap of close to $42 billion, analysts have suggested that the company may need to raise equity to fuind the deal.

The acquisition, should it goes ahead, will eclipse Woolworths' 2005 acquisition of Foodland's New Zealand grocery stores, which cost $2.5 billion, and the $1.4 billion takeover of ALH, a hotel, gaming and liquor store operator in 2004.

Shareholders certainly seem worried about Woolworths' foray offshore, with shares in the retailer down more than 1% in early morning trade, while the S&P / ASX 200 Index (Index: ^AXJO) (ASX: XJO) is up more than 0.5%.

Australian companies don't have good records expanding overseas, with most forced to limp home with their tail between their legs, after losing millions on behalf of their shareholders. Insurance Australia Group (ASX: IAG) was forced to writedown hundreds of millions of dollars on its UK acquisitions, while National Australia Bank (ASX: NAB) has had disastrous expansion into both the US and the UK.

Why Woolworths wants to pay a premium price to expand into Hong Kong is beyond me. I could understand if it was being offered a bargain, then certainly go ahead. But Woolworths is currently struggling with its home improvement category, after over-estimating the positives and admitting it had made mistakes rolling out its Masters stores.

Woolies also faces a resurgent Coles – owned by Wesfarmers (ASX: WES) – that is growing faster than Woolworths, and offering more new products and services to customers. Coles is expanding further into financial products, even applying for a banking licence so it can offer savings accounts to its customers. Woolworths may be better off using the funds to combat the resurgent Coles.

Foolish takeaway

As a Woolworths' shareholder, I'll be hoping the deal doesn't go ahead, and would rather management focus on Australia and improving the existing operations, rather than taking a step into the unknown and risking billions of shareholders' funds.

Savvy investors are now seeking growth in smaller companies. Discover two stellar small-cap opportunities now, in our brand-new research report, "2 Small Cap Superstars" — simply click here to download your FREE copy.

More reading

Motley Fool writer/analyst Mike King owns shares in Woolworths.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »