Shares of Woolworths Limited (ASX: WOW) soared higher last week on news the retail giant was closer to exiting the hardware space.
While Woolworths will sell its Home Timber & Hardware business to rival Metcash Limited (ASX: MTS), it also announced the closure of its Masters chain which has acted as a fire pit for cash in recent years.
Having acted as a huge drag on overall group earnings, Masters will go down as one of the most notable corporate failures in recent history. It failed to compete with Bunnings Warehouse, owned by Wesfarmers Ltd (ASX: WES), and it seems investors are only too keen to move on. Woolworths' shares rose as much as 7.6% on the day the announcements were made, peaking above $26 to end the week at $24.90 on Friday.
However, exiting the chain mightn't be that simple. According to the ABC, US hardware giant Lowe's, which was a one-third joint venture partner with Woolworths in Masters, may have an issue with Woolworths' conduct in the sales process. This seems to be based on the idea that Woolworths had failed to negotiate a reasonable price for the sale, eager to simply distance itself from the hardware sector once and for all.
The ABC reported that Lowe's is seeking to have a liquidator appointed by the Federal Court of Australia to oversee the wind-up of the business in order to ensure Woolworths receives a fair price, thus increasing the proceeds that Lowe's will recognise.
Of course, this has the potential to delay a sales process – potentially for a number of months – while it could also create an unwanted distraction for management. This would not be ideal, particularly at a time where conditions appeared to be improving within their core supermarket division (it reported an improvement in same-store-sales during the final quarter of financial year 2016).
In regards to the sale of Home Timber & Hardware to Metcash, this latest development is unlikely to have any effect on that transaction. Metcash shareholders responded positively to reports that their business would acquire Home Timber & Hardware, which should mesh nicely with Mitre 10, which Metcash also owns.
Woolworths has shown signs of turning its business around, but it's still early days. There is still plenty of work for management to do and shares could remain volatile for some time yet. In the meantime, there are plenty of other great opportunities investors could consider instead.
