Could Woolworths Limited sell Big W?

Woolworths Limited (ASX:WOW) is rumoured to be considering all options.

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First, it was believed all $35 billion of Woolworths Limited (ASX: WOW) could be bought by private equity following a share price fall of almost 30% in the year to September.

Then, the loss-making Masters Home Improvement joint venture was suspected to be an easy target for takeovers.

Earlier this week, Woolworths was allegedly considering axing its expensive relationship with Qantas Airways Limited's (ASX: QAN) Frequent Flyer program, currently part of the supermarket's Everyday Rewards program, in a bid to save costs in the face of growing competition.

Now, KKR & Co and TPG Capital, reportedly have their eyes set on Big W, Woolworths' 'General Merchandise' business. Citing sources close to the matter, Fairfax believes the two firms have made "preliminary" approaches to Woolworths.

What's it worth

While a deal is unlikely to be made any time soon, the sources estimate the Big W business could be worth as much as $1.5 billion to private equity firms. If the sources are correct, the deal could appear very tempting to Woolworths' senior management, who are under pressure to respond to a resurgent Coles, Kmart and Target, and the ongoing dominance of Bunnings Warehouse and Officeworks – all owned by rival Wesfarmers Ltd (ASX: WES).

Data sourced from Woolworths' Annual Reports, 2011 – 2015.
Data sourced from Woolworths' Annual Reports, 2011 – 2015.

Moreover, as can be seen in the chart above, Woolworths' General Merchandise division has not been a game changer for the company. Although it's profitable, last financial year the General Merchandise business produced earnings before interest and tax (EBIT) of just $114.2 million as its profit margin fell to 2.8%, from 3.5%. Woolworths has invested around $702 million in the business since 2011.

Foolish takeaway

Undeniably, Woolworths has its back up against the wall. However, savvy investors and shareholders should be able to read between the lines to recognise the recent weakness in price could be affording us an opportunity to buy into a great business with high-quality assets.

Many of the rumours over recent weeks have proven to be just that; therefore, investors shouldn't rush out to buy shares based on something that may or may not happen.

In June, I provided an in-depth analysis of the process to estimate the value of Woolworths shares.

Motley Fool contributor Owen Raskiewicz has a financial interest in Woolworths. Owen welcomes your feedback on Google plus (see below), LinkedIn or you can follow him on Twitter @ASXinvest. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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