Shares surge on Woolworths takeover battle

Published on Monday 18 August 2008 21:14

SHARES in Woolworths rose sharply yesterday as investors awaited Iceland founder Malcolm Walker's next move in his pursuit of the group's retail arm.

Woolies has rejected as "unacceptable" an approach for its 815 stores from a group headed up by Walker and backed by Icelandic investment group Baugur, which has a 10 per cent stake in Woolies.

Walker's offer is reportedly worth "tens of millions of pounds" and stipulated that Woolworths kept hold of its entertainment distribution and publishing arms, as well as multi-million pension fund deficit and debts.

The retailer, which has just appointed former Focus DIY boss Steve Johnson as chief executive to lead a turnaround, on Sunday dismissed the approach, saying it undervalued the business and involved a complex restructuring.

Analysts have welcomed the idea of a retailing split for the group, and shares were up more than 15 per cent at one point yesterday.

They closed up 0.74p, or 11 per cent, at 7.39p.

Seymour Pierce retail analyst Freddie George said selling the retail operation split would leave Woolworths with businesses of "real value" – entertainment wholesaler EUK and 2 Entertain, the 50/50 joint-venture publishing arm with the BBC.

George added: "We believe shareholders will put management under severe pressure to look at the potential of selling the retailing operations to the highest bidders despite the recent appointment of Johnson.

"The disposal of the retail business would leave the company with the two businesses of real value, EUK and 2 Entertain."

Sales at Woolies' retail empire – which sells everything from clothes to sweets – generates around 1.7 billion in sales but profits have suffered recently thanks to stiff competition from the internet and big supermarkets. Its like-for-like sales fell 6.7 per cent in the six weeks to July 26.

Woolworths, which is currently working on a strategic review, revealed last month that consultants believed it had the potential to build a sustainable business based on its small and medium-sized stores.

But John Stevenson from Shore Capital predicted worse times ahead for the stores.

He said: "We expect the core retail operations to deliver significant losses for the second half of this year and the full year as well, reflecting the impact of both weakening gross margins and like-for-like sales."

Walker, who is also chief executive of Iceland, has yet formally to respond to Woolworths rebuff.

At its financial year end on 2 February, Woolworths' net debt was 124 million.

And according to Woolworths' annual report, it has a pension deficit of 48.2m, but this is due to be revalued.

BGC Partners strategist Howard Wheeldon added: "Clearly Woolworths management would not be doing its duty to shareholders if it was to accept an offer that really is financially ridiculous.

"On the face of it, the offer from Walker can easily look just that and the board is probably right to perceive this as being merely an initial approach that may in time be upwardly revised."