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Woolworths Limited share price jumps on takeover speculation

Credit: Scott Lewis

Woolworths Limited (ASX: WOW) could see its share price jump even further on news that two giant private equity (PE) groups could be about to lob a combined bid for the whole company.

In early trading, shares have jumped 3.7% to $24.59.

The Australian reports that PE companies Blackstone and The Carlyle Group have approached Woolworths board about a potential takeover of the entire supermarket giant. No deal eventuated says the media report, but the odds appear high that other PE players are circling the troubled retailer.

Speculation has also emerged that two other PE firms, Kohlberg Kravis Roberts (KKR) and TPG Capital made a $1 billion offer for Woolworths’ Big W discount variety chain in recent months, but the bid was reportedly rejected.

Woolworths holds its AGM later this week, and investors and shareholders will be keen to get an update on the company’s plans for its struggling businesses. The core supermarkets division has been forced to lower prices, leading to a fall in margins, thanks to competition from arch-rival Coles – owned by Wesfarmers Ltd (ASX: WES) – and discount retailers Aldi and Costco, not to mention IGA, backed by Metcash Limited (ASX: MTS).

Big W has been struggling to remain relevant while Wesfarmers’ dual discount variety brands Kmart and Target appear to have turned around after a few years in the wilderness.

And then there’s the struggling Home Improvement business, with Masters unprofitable and likely to remain so for some years.

Woolworths has a market cap of above $30 billion and an enterprise value of $33 billion, which could cost the potential acquirers close to $40 billion, equivalent to a share price north of $31, compared to today’s price of around $24.59.

Despite the upfront cost, the deal may appear attractive to PE players. Spinning off underperforming, ‘non-core’ businesses and retaining just the core supermarket operations could be the end goal. One idea could be selling the petrol JV with Caltex Australia Limited (ASX: CTX), as Caltex looks to become a larger petroleum retailer since turning its Kurnell refining operation into an import fuel terminal.

Hiving off the Home Improvement business, which includes both Masters and Home Timber & Hardware, either to another PE group or selling parts of it to existing Hardware retailers such as Bunnings and Mitre 10, could also be another idea.

Letting go of those ‘non-core’ and struggling businesses could bring in billions, offsetting the purchase price substantially.

Foolish takeaway

Despite the speculation, it appears unlikely that a takeover for the whole Woolworths group will go ahead given the price. Management is also likely to be unwilling to entertain a cheap price either, given the quality of the underlying food and liquor business.

 

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Motley Fool writer/analyst Mike King owns shares in Wesfarmers and Woolworths. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. 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 Bruce Jackson.

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