Woolworths Group Ltd (ASX: WOW) has announced an acquisition this afternoon – it’s buying a controlling stake of PFD Food Services for $552 million.
Woolworths’ acquisition
Woolworths has announced that it wants to extend its strategic partnership with PFD Food Services by acquiring a 65% stake for $552 million. The Smith family will return 35%. Within that cost, Woolworths is also buying 26 freehold properties which will be leased back to PFD.
The acquisition is priced on an enterprise value to EBITDA multiple of 11x (click here to learn what EBITDA means). The EBITDA is based on pre-COVID EBITDA of $57 million with $157 million of assumed net debt.
However, Woolworths will have 3-year put and call options for the Smith family’s remaining 35% interest. PFD will continue to operate as a standalone business run by its existing management.
Explaining the rationale, Woolworths said that food service is a large adjacent market worth around $18 billion which compliments Woolworths’ current food and every needs offering.
More details on PFD
PFD Food Services is the number two player in a fragmented market. Woolworths thinks the acquisition will provide exposure to the attractive out-of-home food and non-retail business to business markets.
Its customers are clients like quick service restaurants, pubs, restaurants, cafes and convenience stores. Around 85% of its revenue is to foodservice and 15% is for quick service restaurants. It provides bulk buying for businesses who generally order more than $500 per order.
Based on pre-COVID times, it had $2.1 billion of revenue with a market share of around 11%. It has 2,800 employees with 39,000 customers. It has 750 trucks, 68 distribution centres, 1,500 suppliers and sells 22,000 of different items.
Rationale
Woolworths likes the acquisition to provide exposure to a fragmented, growing market with many synergy opportunities. It will enhance store range localisation for its supermarkets (where the range is tailored by store to meet customer needs).
Synergies will be created through better route and capacity optimisation across the entire network including primary freight and metro.
It will also mean that PFD can leverage Woolworths’ platforms like data analytics, digital capabilities and commodity sourcing.
Summary
The acquisition is expected to add to profit/earnings per share (EPS) in the first full year of ownership. It will be funded from existing cash reserves and debt facilities. However, it’s subject to ACCC approval other normal closing conditions.
It seems like a good acquisition by Woolworths, though it’s not a big acquisition in the grand scheme of things. Woolworths doesn’t seem like an exciting defensive ASX dividend share idea right now. Something like Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) could be better for dividends. A2 Milk Company Ltd (ASX: A2M) could be better for growth.
