Woolworths shareholder Perpetual sees turnaround, not takeover, potential
There may be more bad news on the way for Woolworths, but investors may want to get on board now.
Woolworths' largest shareholder, Perpetual Investments, has played down unsubstantiated speculation the retailer may be the target of a private-equity backed takeover bid.
Perpetual Investments' portfolio manager Vince Pezzullo said he had increased his stake in Woolworths to more than 5 per cent not because he considered Australia's largest retailer a takeover target but because he saw turnaround potential.
"I've heard nothing about a bid," Mr Pezzullo told Fairfax Media
Woolworths shares have jumped 7 per cent this week, fuelling talk of a takeover bid. Photo: Louie Douvis
"We're not thinking about it that way – we are buying because we think [chief executive Brad Banducci and chairman Gordon Cairns[ are putting in place strategies to improve the execution in food and liquor, which has been sorely lacking for the last few years," he said.
"We believe in the new strategy, which is to focus on store operations, promotional execution, costs and accountability throughout the whole organisation."
After hitting a 10-year low of $20.71 last week on weak third-quarter sales figures, Woolworths shares have risen 7 per cent this week to $23.05 following an unsubstantiated report that private equity group Kohlberg Kravis Roberts was considering a potential takeover bid.
Woolworths shareholders believe CEO Brad Banducci's strategic review could lead to asset sales and demergers. Photo: Louie Douvis
KKR declined to comment publicly on the speculation. However, sources close to the company said it was not working on a bid at present.
Sources close to TPG, Carlyle Group and Blackstone also denied speculation they were running the ruler over Woolworths.
"There should almost be a fine for media misleading investors with articles not based on fact," one source close to KKR said.
While Woolworths' market value has fallen almost 40 per cent since 2014 and the company is now worth $29 billion, the world's largest private equity firms would struggle to finance a $35 billion bid for the entire group.
Investment bankers said it would take a syndicate of at least three private equity firms to fund an offer for the business as a whole.
However, Woolworths would be an easier target if it sold or demerged its struggling Big W department store chain, its hotel and gaming operations and petrol stations.
Last week, Mr Banducci launched a strategic review of all aspects of the Woolworths group, including its operating structure, store footprint, costs and systems.
Mr Banducci, a former management consultant, said the review was not a precursor to asset sales, but did not rule out divestments to better focus on food and liquor.
"We're certainly not signalling we'd be looking to divest any of our portfolio businesses, but we will manage them as any investor would, depending on what's the right strategy and the right capital holding," he said.
Mr Banducci has also implemented a new business structure that further separates Woolworths' food and non-food operations and is aimed at shifting accountability into the individual business units.
Mr Pezzullo believes Woolworths should consider demerging or selling non-core assets to better focus on food and liquor.
"The benefit of having them under the one roof is questionable – to be bit more focused would be a great help," he said.
"It's clear to us and everyone else that it's pretty much a food and liquor business. If you start stripping parts away, clearly it would become a lot easier [to take over]."
WOW Price at posting:
$23.05 Sentiment: Buy Disclosure: Held
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