Why the Wesfarmers (WES) share price could rise further
Shares in the conglomerate have risen 29% over the last 12 months.
Shares in Wesfarmers (ASX: WES) have been on investors’ radars ever since it sold down its remaining stake in supermarket giant Coles (ASX: COL) a few months ago. The stock has continued its upward trajectory rising 1% on the day and recorded its second straight day of gains on Tuesday, up 0.6% to $58.65 at the time of writing.
Why is the WES stock price rising?
Investors have been gung ho about Wesfarmers shares this week after the conglomerate lobbed a $687 million takeover bid for Priceline Pharmacy owner Australian Pharmaceutical Industries (ASX: API) on Monday.
The non-binding, indicative offer for all of API was at $1.38 a share, representing a 21% premium to its last week’s closing price of $1.145 per share. The bid lifted API shares by nearly 20%.
API’s current major shareholder, Washington H. Soul Pattinson (ASX: SOL) has already backed the proposal and also granted a call option in respect of its 19.3% stake in favour of Wesfarmers.
The KMart and Bunnings owner has been keen to expand into healthcare for some time, and is adequately cashed up since divesting its coal mining operations and spinning off Coles over the last 2 years. Wesfarmers chief executive Rob Scott says the API takeover will enable his company to “form the base” of a new healthcare division within its operations.
Thumbs up for deal
Analysts have reacted positively to Wesfarmers’ bid for API.
Analysts at Citi estimate the transaction will result in earnings per share gains of around 1.7% for Wesfarmers although they see few synergies to arise from acquisition. The analysts instead see the proposal as a strategic move to position the conglomerate for earnings growth in a post-COVID-19 environment.
The analysts believe competing bids from other healthcare firms such as Sigma Healthcare or EBOS Group are unlikely given that the Australian competition regulator would not be likely to approve further consolidation in pharmacy distribution. Citi maintained its rating and price target on Wesfarmers.
Brokerage Jefferies estimates the acquisition would be around 2% accretive on an earnings per share basis, given that the total value of the transaction is equivalent to only 1% of Wesfarmers’ market capitalisation. The analysts also said the bid may be “opportunistic” because API's earnings having been impacted by COVID-19, particularly its stores in CBD locations.
Wesfarmers shares have seen a steady rise, gaining nearly 29% over the last year. Investors are betting that will continue for some more time!
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