The Woolworths Group Ltd (ASX: WOW) share price is edging higher on Wednesday.
In morning trade, the retail giant's shares are up 0.25% to $34.20.
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Why is the Woolworths share price rising?
The Woolworths share price is rising today after the company announced the partial sell down of its stake in Endeavour Group Ltd (ASX: EDV).
According to the release, Woolworths has agreed to sell 5.5% of the issued capital of Endeavour via a block trade at a price of $6.46 per share.
This represents a 3.6% discount to where the Endeavour share price closed yesterday's session.
Following the sale, Woolworths will retain a 9.1% interest in Endeavour. It advised that it has no current intention to undertake a further selldown in the short to medium term.
Woolworths' CEO, Brad Banducci, revealed that the company was selling the stake to raise funds for strategic investments. He said:
Our decision to reduce our stake comes after a successful transition from ownership to partnership with Endeavour Group. The proceeds will be used for strategic investments and general corporate purposes.
Potential acquisitions
While nothing was announced today, the rumour on the street is that Woolworths plans to use these funds to acquire a stake of at least 50% in pet accessories and food retailer PETstock for $600 million.
Goldman Sachs commented on the potential acquisition, noting that "if true this would be in line with its eco-system growth strategy."
The broker sees the transition from liquor and gaming to pet retail as a potentially smart move. It commented:
Strategically, the transition from liquor retail and gaming/hotels into pet retail is in line with its strategy of building a retail ecosystem. Additionally, with declining birth rates in Australia (1.70 in 2021 vs. 1.92 in 2011) resulting in relatively higher growth in the Petcare industry (~5% CAGR 2017-2022 to ~5% 2022-2027, Euromonitor) vs. alcohol retail (~7% CAGR 2017-2022 to 4% 2022-2027e, ABS Retail, GSe), the sector growth outlook appears attractive.
A PETstock acquisition would have the potential to generate synergies, bringing scale to WOW's existing investment in ~58% of Pet Culture (independently operated online petcare retailer) and its vision to expand everyday care categories (via online marketplace and BigW).
Goldman also highlights that the petcare category has strong customer loyalty, which it feels bodes well for Woolworths which already has a loyal customer base using its Everyday Rewards program. It explained:
Our recent conversation with PETstock's key industry player Greencross at our GS Digital Consumer conference showed that the petcare category is a highly loyal business (Greencross ~92% of sales from loyalty program members) with eco-system expansion opportunities (single category shopper ~A$100 spend per year vs. A$1,800 spend full eco-system shopper) and hence if the acquisition does materialize, it could serve as a growth lever to build a new sizeable growth platform for WOW.
