What you need to know about Woolworths' latest acquisition

The Woolworths Group Ltd (ASX: WOW) share price is trading higher following news that it's beefing up its wine business ahead of the big $10 billion spin-off in 2020.

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The Woolworths Group Ltd (ASX: WOW) share price is trading higher following news that it's beefing up its wine business ahead of the big $10 billion spin-off in 2020.

The Woolworths share price added 0.4% to $36.78 while the Coles Group Ltd (ASX: COL) share price lagged with a 0.2% increase to $14.94 and the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index improved 0.2% during lunch time trade.

Australia's largest supermarket chain's subsidiary, Endeavour Drinks, acquired winery Chapel Hill for an undisclosed amount, according to the Australian Financial Review.

This round's on Woolies

The Schmidheiny family from Switzerland sold the South Australian winery, which will be included in a new Endeavour Drink's wine division called Paragon Wine Estates, which houses other premium wine labels Krondorf from the Barossa Valley, Isabel Estate from Marlborough and Riddoch from Coonawarra.

It's difficult to work out what difference the new acquisition will make to the soon-to-be divested alcohol and pub business but the AFR noted that Chapel Hill had a paid-up capital of $25 million (according to ASIC filings) and sells around 80,000 cases wine a year.

Woolworths plans to merge Endeavour Drinks with ALH (its hotel and gaming business) next year so it can focus on its supermarkets and discount department store Big W.

Divestments looking fashionable

The huge restructure follows in the footsteps of Wesfarmers Ltd (ASX: WES) as it cut its apron strings to Coles in November last year.

Demergers are a good way of unlocking value as most candidates outperform the market over the medium-term. The Wesfarmers share price and Coles share price performance is a case in point.

Divestments are arguably a better way of creating shareholder value than acquisitions as history has shown that most of such transactions leave the acquirer worst off.

What's interesting is that Woolworths thought it needed to strengthen the value proposition of its spin-off by acquiring Chapel Hill.

Foolish takeaway

The transaction is unlikely to quell concern by some analysts who regard the Woolworths share price as over-extended.

Endeavour Drinks managing director Steve Donohue said that while the business had several names under its umbrella, none have such a rich history or represent such a great opportunity as the four premium brands he's putting into Paragon Wine.

The acquisition of Chapel Hill includes its cellar door, an ironstone chapel built in 1865, associated buildings including a guest house and 40 hectares under vine.

The Woolworths share price has rallied around 26% since the start of the 2019 calendar year, which is roughly the same as the Coles share price and the Metcash Limited (ASX: MTS) share price.

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. Connect with him on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. 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 Scott Phillips.

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