Is Metcash Limited about to buy Woolworths Limited hardware business?

Metcash Limited (ASX: MTS) could be about to make a bid for Woolworths Limited’s (ASX: WOW) Masters Home Improvement business, according to media reports.

The Australian Financial Review (AFR) says Metcash, which already owns Mitre 10, was one of several bidders that submitted an indicative bid on Monday this week. The AFR says a shortlist will be formalised by the end of this month.

The media report also suggests that Metcash will likely need to raise equity to pay for Masters, a move a number of major investors have already indicated they would support. Metcash’s second-largest shareholder, fund manager Allan Gray has said that it can see merit in the acquisition at the right price.

A combined Mitre 10 Home Timber & Hardware business would create the second-largest player in the home hardware space, with the scale to seriously challenge market leader Bunnings – owned by Wesfarmers Ltd (ASX: WES).

Most of the 400 plus Mitre 10 stores are owned by franchisees – a similar proposition Metcash has with its network of IGA stores. Home Timber & Hardware is primarily a wholesaler and distributor, with 44 stores and Masters was the primary retail face of Woolworths’ hardware business.

Sticking to its knitting, the AFR suggests that Metcash isn’t interested in the Masters retail stores, but a number of other parties, including Bunnings, Charter Hall Group (ASX: CHC) and Abacus Property Group (ASX: ABP) are. Charter Hall and Abacus are likely to seek other tenants for those warehouse stores – and may already have a number of customers in mind.

Woolworths announced a sale or wind up of its hardware business in January after a strategic review found it would lose money for many years before becoming profitable. It’s highly likely that a number of Masters stores will be shut down – particularly if there’s little chance of them ever becoming profitable – while Bunnings was said to be interested in around 15 stores.

Foolish takeaway

A sale of the Masters business at a decent price would be a bonus for Woolworths and could spur its share price higher from here – after recently hitting a 10-year low. Metcash obviously won’t want to pay too much, and it will be interesting to see how the hardware business ends up being split.

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

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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