JB Hi-Fi Limited, Orica Limited and Incitec Pivot Limited: Could Wesfarmers be interested in them?

What would be a good fit for the retailing giant?

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Now that the market knows Wesfarmers Ltd (ASX: WES) has a multi-billion dollar war chest for acquisitions after making deals to sell off its insurance underwriting and broking businesses for a combined total of $2.9 billion, several potential takeover candidates have been floating around in the media.

The company, which operates Coles supermarkets, Bunnings Warehouse, K-mart, Target and a number of other businesses, has a market capitalisation of $50.2 billion, so any acquisition would need to be either of a certain scale to make a difference to earnings or be a foot in the door into an industry that has growth potential.

It already competes with Woolworths Limited (ASX: WOW) in supermarkets, general merchandise, liquor and DIY hardware. It purchased the Coles Group in 2007 for $22 billion, giving it Coles, K-mart, Target and Officeworks. It has mining interests in coal as well.

Media speculation has been that the company may be interested in the following three companies.

JB Hi-Fi Limited (ASX: JBH)

The electronics retailer has a nationwide network of stores and recently introduced its new HOME format that includes household appliances and white goods. It has a $2.07 billion market cap.

Its interim net profit was up 10% and EPS gained 9%. Its share price has pulled back from its November $22.82 high and is currently $20.30. The dividend yield is 3.7%.

Orica Ltd (ASX: ORI)

This company produces industrial and specialty chemical products as well as commercial explosives. It also provides mining services to the resources industry. Its market cap is $8 billion.

With Wesfarmers’ coal business background, the mining nexus could be a plus for supplying necessary supplies without a lot of business overlap. Also, since the mining industry is subdued, it may be able to acquire it at a more attractive price now.

Over the past 12 months, its share price is down 3.7% to $21.43 and its PE is 12.4. The dividend yield is 4.4%.

Incitec Pivot Limited (ASX: IPL)

Similar to Orica, the company produces industrial explosives and fertilisers for the agriculture and mining industries. Its market cap is $4.7 billion.

Since 2011, revenue and underlying net profit have declined, partly due to the mining pullback. Its share price has slipped down about 2.3% to $2.84 in the last 12 months. Its PE is 14.8 and the dividend yield is 3.4%.

Foolish takeaway

None of this supposed acquisition interest has been confirmed by Wesfarmers. Investors should still only consider investing in quality stocks that have good earnings potential regardless of the possibility of a takeover. It may not occur, so you want to buy something you would be happy to own just as it is.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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