Is Woolworths in KKR’s sights?

Rumours have spread that private equity giant KKR (NYSE: KKR) might be looking for a Woolworths (ASX: WOW) supermarket special.

The share price of Woolworths (ASX: WOW) has soared today, up 4% as of 2pm, as rumours spread that private equity giant Kohlberg Kravis Roberts (NYSE: KKR) is running the rule over the supermarket giant.

With a current market capitalisation of over $33bn, it would dwarf the $22bn Wesfarmers (ASX: WES) spent to acquire close rival Coles. If such a transaction occurs, the final price could be considerably higher. Woolworths shares are still not that far from their 52 week low and it is unlikely any Woolworths shareholders would allow the company to be purchased without a significant premium.

If KKR did pull the trigger and acquire Woolworths, they would probably sell off the underperforming Masters and Big W businesses. They would then squeeze out any possible efficiencies in the remaining operations before eventually exiting their position, most likely through an IPO back onto the ASX (ASX: ASX).

The rumours could turn out to be false. As yet, no announcement has been made by either company nor has there been any leaked comments to the media.

The idea of KKR being interested in Woolworths in not so far-fetched. They were one of the parties conducting due diligence on Coles in 2007 before Wesfarmers scooped it up. They also have the appetite for large deals: probably their most notorious is the purchase of consumer brands and tobacco company RJR Nabisco in the 1980s. The then largest leveraged buy-out in history, this deal was subsequently immortalised in the book 'Barbarians at the Gate'.

Woolworths has been attracting negative coverage recently, including from us. Masters and Big W have been performing below expectations and its market share in the food and grocery market has been eroded by a rejuvenated Coles and aggressive Aldi. Woolies also recently saw CEO Grant O’Brien resign with many expecting a change of approach and an external candidate to be hired.

Despite these headlines, Woolworths is still considered the dominant player in the industry. The company has the biggest market share and possesses a store network and supply chain that competitors would love to replicate. Woolworths also has the highest margins of any supermarket business in the world and so these assets would be attractive to any business that could afford them. 

Apart from KKR, no-one really knows whether the rumours are true. For all we know Henry Kravis and his colleagues could be standing in their 57th street headquarters in Manhattan scratching their heads as to what the fuss is about. However, if they are true, then we could see one of the biggest acquisitions ever seen in Australia. 

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Disclosure: staff own shares in Woolworths but they don't include the author. 

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