Is Wesfarmers (ASX:WES) about to buy Greencross?

There is speculation that Wesfarmers may be in line to possibly buy Greencross.

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There is market speculation that Wesfarmers Ltd (ASX: WES) could be in the hunt for Greencross.

For readers who don’t know, Greencross is a business that operates both the Greencross Vets and Petbarn businesses.

According to reporting by the Australian Financial Review, the retail conglomerate Wesfarmers is a leading player in the race to buy the pet business.

Is Wesfarmers going to buy Greencross?

Greencross is currently going through a process of a potential sale or another form of corporate action.

The AFR’s Street Talk reported that Wesfarmers is “firmly in the chasing pack” and is “getting serious about entering the pets sector in what would be a big way”.

Greencross’ owner, the private equity firm TPG, has been collecting interest from potential bidders. It has reportedly been in communication with these possible suitors to bring the review to a conclusion.

A sale of the business isn’t the only option. TPG could decide to break up Greencross or possibly go through an initial public offering (IPO) process.

According to the reporting, Greencross is now making profit of around $300 million a year, which is around three times greater than when it was acquired three years ago.

This potential acquisition comes at an interesting time considering Wesfarmers is currently going through a process of trying to buy the pharmacy business Australian Pharmaceutical Industries Ltd (ASX: API). Wesfarmers sees API as an opportunity to start a health, beauty, and wellness division. Woolworths Group Ltd (ASX: WOW) recently pulled back from its bid for API.

Would Wesfarmers have enough funding to acquire API, Greencross and pay its dividend?

The AFR noted that analysts think the company is financially strong with a net cash position of $109 million at the end of FY21 and annual cashflow generation of a couple of billion dollars.

How is Wesfarmers performing?

The Wesfarmers share price climbed 2.5% yesterday after giving a trading update, though it’s still down around 8% since the start of 2022.

In that trading update, it said it’s expecting to report net profit after tax (NPAT) of between $1.18 billion to $1.24 billion, which is in line with current consensus expectations for the first half of FY22.

This performance was supported by “pleasing” results in Bunnings as well as the Wesfarmers chemicals, energy, and fertilisers division.

However, both Kmart Group and Officeworks have seen impacts from COVID disruptions and costs.

Kmart and Target trading in the first half was impacted by COVID-19 restrictions, with almost 25% of store trading days lost due to lockdowns.

Trading conditions improved as restrictions eased during the second quarter of the 2022 financial year, but customer traffic to stores was impacted by rising community transmissions of COVID-19 in some states, particularly during the Christmas period.

For the six months to 31 December 2021, Kmart and Target sales were down 10.3% year on year and down 5.2% compared to two years ago. However, Catch’s gross transaction value was up 1% year on year and increased 97.5% over two years.

Wesfarmers said that it has managed the global supply chain issues well, with the decision to hold extra inventory domestically. High levels of COVID-related impacts on staff in NSW and Victoria meant that distribution centres were impacted on the delivery of stock to stores in line with customer demand.

The ASX share talked about higher wage costs, commitments to paying team members through these difficult times, rising supply chain costs, and higher stocking holding costs.

Retail trading conditions weakened in the last two weeks of 2021, with customer traffic subdued in the first half of January 2022.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns and has recommended Wesfarmers Limited. 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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