The share price of Wesfarmers Ltd (ASX: WES) has been on a recovery path over the past two months but management may have up to an extra $12 billion to charm investors into bidding up the stock.
Shares in the conglomerate have been clawing back into shareholders' good books since it announced the spin-off of its Coles supermarket business and the sale of its embattled UK hardware business.
This has helped trigger a 12% rally in its share price in the last three months alone when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) has added 2% over the same period.
The stock could rally further as the Australian Financial Review reported that Citigroup is estimating Wesfarmers could get up to $12 billion to buy its next growth story, or it could undertake a $6.5 billion capital return to excite the market.
The capital return would most likely come as a share buyback although one can't rule out a special dividend, but Citigroup thinks an acquisition is more likely given the maturity of Wesfarmers remaining businesses.
Wesfarmers needs to show growth if it wants to sustain its share price momentum and fortunately $12 billion buys it a lot of options!
Citigroup thinks management will avoid industries that it's already familiar with such as retail and mining, while finance is probably also off-limits given what's happening with the Royal Commission.
But that still leaves a wide range of potential targets.
According to the AFR, the broker highlighted a list of 40 companies that could catch the eye of Wesfarmers and these include our national carrier Qantas Airways Limited (ASX: QAN), packing company Amcor Limited (ASX: AMC), logistics group Brambles Limited (ASX: BXB), hospital operator Ramsay Health Care Limited Fully Paid Ord. Shrs (ASX: RHC), telco TPG Telecom Ltd (ASX: TPM), power utility AGL Energy Ltd (ASX: AGL), petrol station operator Caltex Australia Limited (ASX: CTX), and oil and gas producers Woodside Petroleum Limited (ASX: WPL) and Santos Ltd (ASX: STO).
Some of these names have really surprised me as the companies are facing some challenging times ahead. It would also be interesting to see how Wesfarmers can structure a deal to swallow these large caps given that its war chest won't be nearly enough, but one can't rule out the conglomerate bidding as part of a consortium or buying parts of these businesses.
But Wesfarmers could just as easily buy a private company too, so it's not a given that the conglomerate's billions could flow through to the market.
However, a cash-flushed Wesfarmers doesn't make the stock a good buy in Citigroup's opinion as the broker is reiterating its "sell" recommendation on the stock.
In fact, the market seems to like Wesfarmers more than brokers do as the majority of analysts covering the stock have a "sell" or "hold" equivalent rating on Wesfarmers.
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