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%.
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.