Is Woolworths Limited a takeover target?

The share prices of our supermarket stocks could come under pressure today as US$39 billion ($51.2 billion) was wiped off the S&P 500 Consumer Staples Index in the US after online retail giant Amazon Inc. said it was buying Whole Foods Market, Inc.

If that is any guide, shareholders in Woolworths Limited (ASX: WOW), Wesfarmers Ltd (ASX: WES), and Metcash Limited (ASX: MTS) should hang on as they could be in for a volatile ride!

Amazon made a US$13.7 billion takeover bid for organic grocery chain Whole Foods on Friday in the US, a move that will give Amazon a much stronger platform with a network of physical stores to pursue the US$600 billion grocery market.

The deal added US$12.5 billion to the market value of Amazon and US$3 billion to Whole Foods, but investors dumped other US supermarket stocks as grocery is seen as one of the last few retail segments to be disrupted by the online titan.

This will be a wake-up call for investors in our supermarkets as the focus of Amazon’s Australian debut has been squarely on other retailers like department store operator Myer Holdings Ltd (ASX: MYR), electronics chain JB Hi-Fi Limited (ASX: JBH) and Harvey Norman Holdings Limited (ASX: HVN).

Our supermarket stocks have already been battling low cost offshore rivals like Aldi and the threat of Amazon opens a new battle front for the sector.

The silver lining could be takeover activity. If Amazon requires a network of physical stores to conquer the grocery sector in the US, who is to say it won’t be thinking about a similar strategy in Australia?

From that perspective, investors will be asking themselves who would make the most ideal target. Wesfarmers, the owner of the Coles supermarket chain, might just be too difficult given the diversity of its businesses – unless Amazon finds a bidding partner to take over the parts it doesn’t want.

Metcash could make sense as it’s a wholesaler at its core and distributes to around 2,000 IGA, Friendly Grocer and Eziway stores around the country. However, a good number of these stores are franchisees and dealing with this group of stakeholders would add an additional layer of complexity for Amazon.

Woolworths would make a cleaner target, particularly if it sells its underperforming BigW department chain. Certainly its $34 billion market value won’t be much of an impediment to the likes of Amazon.

This is all speculation though, and unless you are a well-trained hedge fund manager, you should never invest based on takeover appeal. Further, it is unlikely Amazon will want to contemplate a sizable acquisition while it is digesting (no pun intended) its $18 billion takeover of Whole Foods.

One would think it will want to bed down the acquisition and see how the integrated model performs before making its next move.

In the meantime, investors of Australian-listed retailers and supermarkets will be kept sitting on the edge of their seats.

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Motley Fool contributor Brendon Lau has no position in any stocks mentioned. The Motley Fool Australia owns shares of Wesfarmers Limited. 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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