Woolworths goes shopping

Supermarket retailer expected to bid US$3 billion for Hong Kong grocer

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published October 17, 2013 9:51 am AEDT

Supermarket retailing giant Woolworths (ASX: WOW) is reported to be in the final stages of submitting a bid of around US$2.8 billion for Hong Kong's second-largest grocery chain, ParknShop.

According to the Australian Financial Review (AFR), Woolworths is expected to pay around 15-16 times earnings before interest, tax, depreciation and amortisation (EBITDA), which would equate to a sale price of around US$3 billion. While the price is small compared to Woolworths' market cap of close to $42 billion, analysts have suggested that the company may need to raise equity to fuind the deal.

The acquisition, should it goes ahead, will eclipse Woolworths' 2005 acquisition of Foodland's New Zealand grocery stores, which cost $2.5 billion, and the $1.4 billion takeover of ALH, a hotel, gaming and liquor store operator in 2004.

Shareholders certainly seem worried about Woolworths' foray offshore, with shares in the retailer down more than 1% in early morning trade, while the S&P / ASX 200 Index (Index: ^AXJO) (ASX: XJO) is up more than 0.5%.

Australian companies don't have good records expanding overseas, with most forced to limp home with their tail between their legs, after losing millions on behalf of their shareholders. Insurance Australia Group (ASX: IAG) was forced to writedown hundreds of millions of dollars on its UK acquisitions, while National Australia Bank (ASX: NAB) has had disastrous expansion into both the US and the UK.

Why Woolworths wants to pay a premium price to expand into Hong Kong is beyond me. I could understand if it was being offered a bargain, then certainly go ahead. But Woolworths is currently struggling with its home improvement category, after over-estimating the positives and admitting it had made mistakes rolling out its Masters stores.

Woolies also faces a resurgent Coles – owned by Wesfarmers (ASX: WES) – that is growing faster than Woolworths, and offering more new products and services to customers. Coles is expanding further into financial products, even applying for a banking licence so it can offer savings accounts to its customers. Woolworths may be better off using the funds to combat the resurgent Coles.

Foolish takeaway

As a Woolworths' shareholder, I'll be hoping the deal doesn't go ahead, and would rather management focus on Australia and improving the existing operations, rather than taking a step into the unknown and risking billions of shareholders' funds.

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Motley Fool writer/analyst Mike King owns shares in Woolworths.

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