Will buy Target from Wesfarmers Ltd in 2018?

Credit: Target

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.

The 66,826.77% “wonder share” that shows no sign of stopping

JUST RELEASED! Check out our brand-new free report, “One Stock to Buy and One to Sell in the Age of Amazon”… revealing our #1 recommendation for the future of online retail in Australia AND the #1 stock our experts are convinced you should unload immediately

Plus, you’ll even discover one special bonus recommendation! It’s a mind-blowing 66,826.77% winner that we believe will rocket into 2018 and beyond.

Your copy of this timely new report is completely free, so don’t miss out. Discover the 66,826.77% wonder stock now. Enter your email address here to discover your brand-new FREE report.

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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.