Suitors eye Woolworths’ Big W unit

The sale of Big W could secure around $1.5 billion for Woolworths.

Woolworths has this morning refused to comment on speculation that two private equity giants, KKR and TPG Capital, had made preliminary advances to the board to buy struggling discount retailer Big W for around $1.5 billion.

It was reported by Bloomberg that talks between the buyout firms and Woolworths (WOW) were in the formative stages, with no clear indication on the retailer’s desire to sell.

The Australian reported in its DataRoom column in July that Big W had come under the microscope of private equity firms.

Woolworths has other, much bigger fires, to put out in its business such as fixing its flagship Australian supermarkets group stemming the huge losses at its Masters hardware chain.

The sale of Big W could reportedly secure around $1.5 billion for Woolworths at a time when it needs to pour more investment in its Australian supermarkets arm to lower prices, refurbish stores and lift the in-store experience for shoppers.

However, Woolworths shareholders have been burnt in the past when dealing with private equity. In late 2012 Anchorage Capital bought consumer electronics chain Dick Smith from Woolworths for $94 million and after a quick repair job floated it on the sharemarket a year later in a $344 million IPO.

The rumour of the Big W sale follows recent speculation Woolworths could liquidate its Masters hardware joint venture or sell its Home Timber & Hardware unit. That decision could happen soon if its joint venture partner in Masters, US hardware group Lowe’s, decides to exercise its option to sell its 33 per cent stake back to Woolworths.

Big W has been struggling for many years with declining sales and earnings, while at the same time main rivals in the discount department store sector, namely the Wesfarmers-owned Target and Kmart, have been reaping stronger sales and growing profitability.

Big W hasn’t grown its sales and earnings since 2013. Last financial year the chain’s EBIT slumped by 25.3 per cent to $114.2 million with sales down 5.7 per cent to $4.1 billion. In fiscal 2014 pre-tax earnings fell by just over 20 per cent.

At Woolworths full-year results in August the company warned that although sales had improved in July relative to the fourth quarter, sales were still disappointing with like-for-like sales for the first eight weeks of fiscal 2016 down 8.9 per cent.

This is in stark contrast to the robust performance by Kmart and Target which both posted their first-quarter sales results yesterday. Wesfarmers general merchandise chain Kmart was the best performer in the Perth-based company’s portfolio as sales jumped 12.5 per cent to $1.123 billion. Target continued to show signs of continued and sustainable improvement, with sales up 3.1 per cent to $776m. Its like-for-like sales were 3.2 per cent better.

This has led many investors to believe the problems facing Big W were not industrywide but specific to Woolworths.

Indeed, the Big W chain has also suffered a string of operational setbacks recently including the sudden and still unexplained exit of its relatively new boss Alistair McGeorge in August and a botched IT system that has caused stock ordering problems.

Woolworths head of retail services Penny Winn, who had decided earlier this year to leave and pursue a non-executive director career, has been drafted to stay on a while longer and act as Big W managing director until a replacement is found.

With annual sales of $4.1 billion Big W makes up 6.75 per cent of Woolworths’ total sales but only 3 per cent of its annual pre-tax earnings.