First, it was believed all $35 billion of Woolworths Limited (ASX: WOW) could be bought by private equity following a share price fall of almost 30% in the year to September.
Then, the loss-making Masters Home Improvement joint venture was suspected to be an easy target for takeovers.
Earlier this week, Woolworths was allegedly considering axing its expensive relationship with Qantas Airways Limited's (ASX: QAN) Frequent Flyer program, currently part of the supermarket's Everyday Rewards program, in a bid to save costs in the face of growing competition.
Now, KKR & Co and TPG Capital, reportedly have their eyes set on Big W, Woolworths' 'General Merchandise' business. Citing sources close to the matter, Fairfax believes the two firms have made "preliminary" approaches to Woolworths.
What's it worth
While a deal is unlikely to be made any time soon, the sources estimate the Big W business could be worth as much as $1.5 billion to private equity firms. If the sources are correct, the deal could appear very tempting to Woolworths' senior management, who are under pressure to respond to a resurgent Coles, Kmart and Target, and the ongoing dominance of Bunnings Warehouse and Officeworks – all owned by rival Wesfarmers Ltd (ASX: WES).
Moreover, as can be seen in the chart above, Woolworths' General Merchandise division has not been a game changer for the company. Although it's profitable, last financial year the General Merchandise business produced earnings before interest and tax (EBIT) of just $114.2 million as its profit margin fell to 2.8%, from 3.5%. Woolworths has invested around $702 million in the business since 2011.
Foolish takeaway
Undeniably, Woolworths has its back up against the wall. However, savvy investors and shareholders should be able to read between the lines to recognise the recent weakness in price could be affording us an opportunity to buy into a great business with high-quality assets.
Many of the rumours over recent weeks have proven to be just that; therefore, investors shouldn't rush out to buy shares based on something that may or may not happen.
In June, I provided an in-depth analysis of the process to estimate the value of Woolworths shares.
