Why the Woolworths share price jumped more than 5% today

Credit: Scott Lewis

Woolworths Limited (ASX: WOW) saw its share price zoom more than 5% higher today, to $22.74, amid renewed speculation of a takeover bid materialising.

The Australian reports today that private equity firm Kohlberg Kravis Roberts (KKR) has been running the numbers on the company as recently as the past few weeks. The newspaper reported last year that private equity firms were known to be weighing a potential takeover of the entire company, including KKR, Blackstone and The Carlyle Group.

Local deal makers are sceptical of the ability of private equity groups to find the money to buy Woolworths according to The Australian, but buyout firms say large amounts of global capital are floating around looking for opportunities.

With bond yields struggling to beat inflation, investors are clearly looking for better returns on their capital.

Recent falls in the Australian dollar from 78 US cents just a few weeks ago to 73.6 US cents now, also make an investment in Australia more attractive.

But The Australian is also reporting that private equity bidders believe the share price will fall even further, making the supermarket and retail giant an even more attractive buy in the future.

Woolworths’ share price has plunged from a high of $38.92 in April 2014, to the current price of around $22.74, thanks to four consecutive quarters of negative same-store-sales growth. The company has struggled to retain its leading market share, and customers are switching to rival Coles – owned by Wesfarmers Ltd (ASX: WES) – or discounter Aldi, because Woolworths is perceived to be the most expensive supermarket retailer.

Woolworths earnings before interest and tax (EBIT) margins reached 8% in 2014, but Coles by comparison had margins of just over 5%. To remain competitive, Woolworths has had to slash prices, which obviously will impact on margins and earnings.

That, in turn, is forcing the share price lower – so it’s not surprising to hear that PE firms think they can get a cheaper price for Woolworths if they are patient.

It would still be a massive bite to chew, with Woolworths’ market cap currently $29 billion and an enterprise value of over $31 billion.

Foolish takeaway

A consortium including KKR had offered to buy Coles before it was trumped by Wesfarmers’ $22 billion bid in 2007. News that KKR is now sniffing around Woolworths should not be a surprise, but whether a takeover bid materialises is another question.

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Motley Fool writer/analyst Mike King owns shares in Woolworths and Wesfarmers. You can follow Mike on Twitter @TMFKinga

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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