Is Wesfarmers Ltd preparing to do battle with Telstra?

Rumours of a massive acquisition continue to circulate.

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What:  An article in The Australian Financial Review has drawn attention to speculation that cashed up conglomerate Wesfarmers Ltd (ASX: WES) could have run the ruler over Australia’s second largest telecommunications company Optus, which is owned by Singapore Telecommunications Ltd (CHESS) (ASX: SGT).

So what: The speculation is not as far fetched as it might seem. Wesfarmers’ management will currently be assessing the best options for its elevated cash balances which have been boosted thanks to a number of asset sales including the $1.8 billion sale of its underwriting business to Insurance Australia Group Limited (ASX: IAG). The conglomerate certainly has a penchant for owning businesses with stable cash flows and Optus could fit the bill nicely.

Now what: An acquisition of Optus would not only require parent SingTel to be a willing seller but it would also pit Wesfarmers against the mighty Telstra Corporation Ltd (ASX: TLS). Given that Wesfarmers already has the experience of going head-to-head with Woolworths Limited (ASX: WOW) in retailing, it is unlikely that management would be put-off from competing with Telstra.

Whether a large acquisition such as Optus or Healthscope eventuates, given management’s track record investors can have confidence that a focus on shareholder value will be at the centre of capital allocation decisions. Management always has the option of returning cash to shareholders.

With the coal division underperforming and the potential for some form of value accretive capital management, now could be a good time for long-term investors to consider Wesfarmers.

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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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