Why the Woolworths (ASX: WOW) share price rallied 2% (Merger Update)

This article was originally published at MF & Co. Asset Management.

Why the Woolworths share price rallied 2% (Merger Update)

Woolworths Group Limited (ASX WOW) reported the merger of Endeavour Limited and ALH Group to form a combined entity, Endeavour Group Limited. The WOW share price bounced by more than 2% off the back of the news today.

After the merger of the two companies to form Endeavour Group Limited, Woolworths plans to demerge the combined entity from its business to enable simplicity and growth, and value accretion of both the businesses.

About Woolworths Group Limited

Woolworths Group Limited (ASX WOW) constitutes of several top brands in retailing. It manages some trusted brands like Woolworths, BWS, Dan Murphy’s, and Langton’s, to name a few.

Overall, the business of Woolworths Group caters to the Australian food business, New Zealand food business, Endeavour drinks, and hospitality business through ALH Group. The company reaches 28 million customers nationwide.

Merger Update

Woolworths Group Limited (ASX WOW) reported today that it is merging its Endeavour Drinks and ALH Group businesses to form Endeavour Group Limited. The combined entity will then be separated from the main Woolworths Group.

After the completion of the merger, Woolworths Group will still remain the leading food and everyday needs business in Australia and New Zealand, while the separated entity will, in itself, form integrated drinks and hospitality business with more than AUD 10 billion of sales.

Endeavour Group Limited will be 85.4% owned by Woolworths Group and 14.6% by Bruce Mathieson Group. The ongoing service agreements will be retained, and the business will be poised for steady growth. Woolworths Group and Endeavour Group will grow together in partnership and will have a more customer-centric operating model.

Endeavour Group will consist of 227 stores of Dan Murphy’s, stores of BWS, specialty stores like Langdon’s, Cellarmasters, Jimmy Brings, stores of Pinnacle, and online offerings, in addition to the 327 ALH operated hotels.

The separation of the Endeavour Group will take place in 2020 after a formal restructuring process. The demerger will be voted at the annual general meeting of 2019.

Financial Position of Woolworths Group Limited

Woolworths Group has demonstrated a steady and consistent increase in most of the financial parameters for the past three years ending June 2016, 2017, and 2018. Total revenues increased from AUD 53.6 billion in 2016 to AUD 55.03 billion in 2017 to AUD 56.9 billion in 2018.

Woolworths (ASX WOW)-revenue

Additionally, compared to the industry average, Woolworths Group has reported a higher P/E ratio, Price to Sales ratio, and Price to Cash Flow ratio.

Our Takeaway

Both from the historical and current point of view, Woolworths Group holds good growth potential. The company is well positioned with a dominant position in the market and has almost always outperformed its peers and competitors.

Woolworths Group also holds a history of regular and consistent dividends with a dividend yield of over 3%.

The company has grown in double digits in the past few years, and the future looks brighter than the past. The move of merging the drinks and hospitality businesses to form a combined entity will further enhance the potential, growth, and scope of the newly formed entity along with the remaining Woolworth Group.

Henry Fung is a Partner Managing Director and co-founder of MF & Co. Asset Management. He is a highly experienced equities, derivatives and financial markets professional with over 12 years of experience. Henry specialises in building trading algorithms & systems, quantitative & qualitative analytics across macroeconomic, fundamental and technical disciplines and currently runs the MFAM VPAC AU/US models portfolios. The management Partners and Adviser team have decades of experience between them, with experience from major Investment Banks and Brokers. Their Advisers are highly experienced, having dealt with some of the wealthiest clients in Australia.

Categories: Australian Stocks

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