After a week of speculation, ParknShop is a no-go for Woolworths

The retailer has remained tight-lipped regarding a potential acquisition in Hong Kong.

a woman

Practically every day last week, media reports were providing the latest update on Woolworths’ (ASX: WOW) Asian expansion plans – from the price it was bidding, to how it would finance it via cheap Asian debt. Mind you, this was all without an official word from the retail giant!

According to the Australian Financial Review, Woolies has pulled out of the running to buy Hong Kong’s second largest supermarket chain, ParknShop, with those close to the matter citing price as the key stumbling block. According to the AFR, the owner of ParknShop was asking between $3 billion and $4 billion for the 345-store chain. At $3 billion, the cost represents around 15 times earnings before interest, tax, depreciation and amortisation.

News that the board decided to withdraw from the bidding will likely please many shareholders. Given next to no synergies, the risk of expansion offshore, the mature state of the Hong Kong market and an informed seller, there really didn’t appear to be a lot going for Woolies.

Of course the big allure of the ParknShop franchise was the potential to use it as a stepping board from Hong Kong into mainland China – indeed ParknShop already has around 60 stores in China. However, if the current sellers, who are already Asian-based, aren’t seizing that opportunity it’s difficult to see why Woolies would be better positioned to successfully expand the franchise.

Woolworths’ size and the mature Australian marketplace does leave shareholders pondering the question, what next? Does Woolworths begin returning significantly more cash to shareholders or does it continue to look for meaningful growth initiatives offshore?

The move into hardware, where it is competing with the Wesfarmers(ASX: WES) Bunnings has significant potential given Bunnings has revenues approaching $8 billion. Likewise, given its customer base, the financial services space also offers significant potential on the domestic front.

Foolish takeaway

Failed overseas expansions such as National Australia Bank’s (ASX: NAB) move into the US market are often hailed as reasons to be wary of offshore moves. While the management of firms such as Woolworths and NAB need to understand that an entrenched domestic market position is a major advantage that cannot be easily replicated overseas, it is also important that investors judge each initiative on its merits and don’t blindly reject all overseas moves.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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