Will buy Target from Wesfarmers Ltd in 2018?

Conglomerate Wesfarmers Ltd (ASX: WES) may just catch a lucky break this year and play catch up with its rival if a wild prediction by a US technology analyst comes to pass.

The analyst is predicting that online shopping giant will make a bid for US department store Target this year to bolster its retail offering following Amazon’s US$13.7 billion acquisition of upmarket grocer Whole Foods in the US, according to a report today in Bloomberg.

The analyst may be referring to the US but the reasons behind his prediction are just as relevant for the Australian market where Target is struggling.

Target Australia is creating big headaches for owner Wesfarmers and has contributed to its share price underperformance with the stock recording a relatively paltry 4.5% gain over the past year, despite strong coal prices and strength in its Bunnings chain.

In contrast, arch-rival Woolworths Group Ltd (ASX: WOW) has enjoyed an 11.5% increase as Wesfarmers also lags the broader market with the S&P/ASX 200 (Index:^AXAO) (ASX:XAO) up by around 5.5% over the same period.

It appears Wesfarmers doesn’t seem to have a convincing plan to turnaround the struggling business, at least not from what I can tell.

The analyst thinks the Amazon US strategy makes sense for two reasons. The first is shared demographics with both Amazon and Target aiming at mothers and families.

The second is Target’s store network, which is fairly comprehensive but still manageable for the online shopping titan.

Target in the US is a listed company in its own right and Amazon will have to cough a premium up if it wants control. The typical takeover premium averages between 20% and 30%, although the analyst thinks Amazon could get away with paying a 15% premium instead as traditional retailers are on the nose. This implies a valuation of US$41 billion.

I can imagine an even smaller premium to take out Target Australia given the state of the industry which is epitomised by the performance of fellow department store operator Myer Holdings Ltd (ASX: MYR).

It will probably be a lot quicker and simpler too, as Wesfarmers could see this as a win-win.

Not having Target tied around its neck could help trigger a re-rating in the stock and would be one less fire the board will need to deal with. Management can then focus more on its Coles supermarket chain, which has been losing ground in more recent times.

Having said that, I won’t be surprised if Woolworths offloads BigW if it is given a good enough offer too, as BigW has been just as problematic for Woolworths as Target is for Wesfarmers.

Sit tight! The shakeup in retail isn’t over and may only just be beginning.

The problem is guessing the timing of any approach. Investors also shouldn’t make their investment decisions based on merger and acquisition activity.

If you are wondering who are the winners and losers from the Amazon onslaught, the experts at the Motley Fool may have the answers. Click on the free link below to find out what you should be buying or avoiding in the year ahead.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended 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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