Why there’s no bid coming for Woolworths Limited

Credit: Scott Lewis

Earlier this week we wrote an article based on a news report by The Australian that suggested private equity firms were looking closely at supermarket retailer Woolworths Limited (ASX: WOW), with a potential takeover offer coming.

Woolworths’ share price has surged as a result, up 5% on the day the news release came out and another couple of percent the day after, but unfortunately it’s all misleading.

There’s no bid likely, and the story by The Australian is unsubstantiated, and likely to be pure speculation. Either the newspaper’s sources have misled the company or The Australian has misconstrued what its sources are telling it. Woolworths share price is likely to react by falling back to levels before the news story was published.

Fairfax Media reports that one of its sources have said that private equity firm Kohlberg Kravis Roberts (KKR) is not working on a bid at present.

It’s happened before, with The Australian speculating in June 2015 that KKR was putting together a bid for Woolworths. Again, there appears to have been nothing behind that story as well.

The supermarket operator is definitely struggling, with margins in its core food and liquor division slashed, the sell off/shuttering of its Masters home improvement division and ongoing struggles for discount variety store Big W. But the odds of a bid for the full company appear highly unlikely given the takeover cost of well over $30 billion at the current share price of around $22.44.

Woolworths’ share price is likely to fall further from here as it invests more into slashing the prices of groceries, weakening margins and profits. Share prices generally follow earnings per share, and as earnings come down, so too will Woolworths’ share price. Potential bidders may well be biding their time and waiting for a cheaper price too.

The company’s largest shareholder, fund manager Perpetual Limited (ASX: PPT) has also played down the unsubstantiated speculation, but noted that it had increased its holding to more than 5% on turnaround potential.

However, should Woolworths sell off more of its assets to focus on its core food and liquor business, that would make it smaller and increase the potential for a takeover offer to arrive.

Foolish takeaway

It remains a vital lesson to me, investors and readers not to believe everything you read in the newspapers.

Woolworths shareholders will need to be patient and leave it to management to rectify the share price slump the old fashioned way – through hard work – which may take time.

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Motley Fool writer/analyst Mike King owns shares in Woolworths. 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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