What is weighing on the Wesfarmers (WES) and Woolworths (WOW) share price?

Posted: 2 December 2021 1:06 pm
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Shares in the 2 conglomerates have risen around 20% over the last 12 months, but a purchase is weighing both companies down.

Shares in old rivals Wesfarmers (ASX: WES) and Woolworths (ASX: WOW) were suddenly in the spotlight on Thursday, slipping by 0.5% and 1% in early trading.

Why are the WES and WOW stock prices in the spotlight?

Woolworths on Thursday renewed the old rivalry between the 2 supermarket giants (Wesfarmers is the former owner of Coles) after lobbing a surprise bid for Priceline Pharmacy-owner Australian Pharmaceutical Industries (ASX: API), driving the target’s share 16% higher to a 52-week peak of $1.74.

Wesfarmers looked to have sealed a deal for API early last month after acquiring a 19.3% stake in the firm and lifting its takeover offer price to $1.55 a share, which was enough to see off rival bidder Sigma Healthcare.

The Kmart and Bunnings owner has been keen to expand into healthcare for some time, after spinning off Coles over the last 2 years and had said API would “form the base” of a new healthcare division within its operations.

However, Woolworths dealt those hopes a blow after lobbing its $872 million takeover bid.

The retail giant is offering $1.75 a share for API, a 12.9% improvement on Wesfarmers’ bid.

Investors now fear the move could trigger an all-out bidding war for the pharmacy retail chain that could weigh on the balance sheet of the 2 competitors.

Healthcare focus

Woolworths CEO Brad Banducci said there was a compelling strategic rationale to support the API acquisition.

“Health and wellness is a large, fast-growing category and API would be a fantastic addition to our food and everyday needs ecosystem. If successful, we will continue to support API’s community pharmacy partners to deliver better experiences for both customers and pharmacists,” he said in a statement to the ASX.

If successful, the transaction will be funded from the group’s existing balance sheet capacity and is expected to deliver attractive returns for Woolworths shareholders over the medium term.

Analysts have previously noted the likelihood of supermarket operators expanding into the healthcare sector, which had so far been successful in keeping out the retail giants to prevent competition.

But the takeover battle for API would raise the stakes for both Wesfarmers and Woolworths and also result in the loser pursuing other opportunities to expand into the pharmacy segment.

That could weigh on the bottom line of the 2 companies, at least in the near term.

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