Woolworths share price higher on acquisition news

The Woolworths Group Ltd (ASX:WOW) share price is pushing higher today after announcing a major new investment. Here’s what it announced…

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Woolworths share price

Source: Woolworths

The Woolworths Group Ltd (ASX: WOW) share price is pushing higher on Wednesday after announcing a major strategic investment.

At the time of writing the conglomerate’s shares are up 1.5% to $40.77.

What did Woolworths announce?

This afternoon Woolworths announced that it intends to extend its strategic partnership with leading foodservice supplier PFD Food Services by acquiring a 65% equity interest. This will leave its founders, the Smith family, with a 35% stake.

According to the release, Woolworths will also acquire 100% of PFD Food Services’ freehold properties, which primarily comprise 26 distribution centres.

However, PFD Food Services will continue to operate as a standalone business, retain its senior leadership team, and partner with Woolworths to deliver better experiences for customers.

The parties have agreed a total purchase price of $552 million for the 65% equity interest and freehold properties. This will be funded from existing cash reserves and available debt facilities and is not expected to affect the company’s existing credit metrics.

Why is Woolworths making this investment?

Woolworths Group CEO, Brad Banducci, believes this is a logical investment for the company to make.

He commented: “This investment is a logical adjacency for Woolworths Group and further supports the evolution of the Group into a Food and Everyday Needs Ecosystem. It will build on our existing partnership with PFD, the number two player in the large and fragmented out-of-home foodservice and non-retail business-to-business markets.”

 Mr Banducci also expects the investment to unlock synergies and support its growth.

“The investment will also unlock synergies for both businesses across the combined network and fleet. We will help to support PFD’s growth through access to our logistics, digital and data analytics and operational capabilities. For Woolworths Group, it will enhance store range localisation and provide fleet synergies through better route and capacity optimisation across our combined network,” he explained.

What now?

Management notes that like many other businesses, PFD Food Services has been impacted by the pandemic.

Nevertheless, the investment is expected to be earnings per share accretive in the first full year of ownership and deliver a strong return on investment to Woolworths.

The transaction is subject to an earn-out at the end of FY 2022 and FY 2023 if earnings growth materially exceeds the business plan. In addition to this, put and call options have been granted to the Smith family and Woolworths Group respectively over the remaining 35% shareholding. These are exercisable from the third anniversary of completion.

The transaction remains subject to ACCC approval and the satisfaction of customary closing conditions, with completion expected by the end of calendar year 2020.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Woolworths 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 Scott Phillips.

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