Supermarket retailer Woolworths Limited (ASX: WOW) may be down in the dumps, under fire from all sides and headless after CEO Grant O'Brien announced his retirement yesterday.
But that could be the perfect opportunity for large private equity firms to come knocking. A cheap price for a solid supermarket retailer with a dominant market position is the first enticing premise.
Masters – Mitre 10 marriage?
The opportunity to take an underperforming business in Masters and inject fresh life into it and turn it into a decent competitor to Bunnings – owned by Wesfarmers Ltd (ASX: WES) – and Mitre 10 – owned by another struggling retailer in Metcash Limited (ASX: MTS), could be another tempting proposition.
The Australian Financial Review (AFR) has even suggested the possibility of a tie-up between Masters and Mitre 10 – creating a hardware giant that would be capable of competing against Bunnings – arguably one of Australia's best retailers.
And with Metcash financial strapped and potentially up for a sale of its hardware business, now could be the perfect time to marry Mitre 10 and Masters. The combined business would have around 13.2% of the market according to the AFR – low enough not to attract the ire of the competition regulator the Australian Consumer and Competition Commission (ACCC) – but high enough to offer some serious scale advantages.
Or there's the potential for Woolworths to buy Mitre 10, combine it with its Masters and Home Timber and Hardware brands and either flog it off or list it as a separate entity on the ASX.
Wesfarmers – Coles lesson
Readers may remember that when Coles was facing a multitude of issues in 2007, it was a syndicate of companies that was led by US private equity firm Kohlberg Kravis Roberts that first came calling with two low-ball offers for the Coles businesses.
As the image below shows, Coles was struggling to generate growth – much like Woolworths is now.
Wesfarmers eventually paid around $22 billion for Coles in 2007, so it would take mighty big pockets to take over Woolworths. The retailer's current enterprise value (equity plus debt less cash) stands at $37.2 billion.
But a consortium of private equity firms would have the capacity to make a reasonable offer, particularly if they hived off some of the non-supermarket businesses such as hardware, Big-W or hotels, and especially with interest rates on debt so low currently.
Foolish takeaway
We'll have to wait and see if any potential predators are circling the beleaguered supermarket retailer while there's blood in the water. But don't be surprised if this is this isn't the first time we hear about a potential takeover for Woolworths.
