The Woolworths Group Ltd (ASX: WOW) share price is higher after the retail business announced that it had spent $586 million for a 55% interest of the PETstock business.
Woolworths grows in pet sector
The parent business of PETstock is Petspiration Group, which has operations in both Australia and New Zealand.
PETstock has a network of 276 stores, it has established e-commerce platforms such as Pet.co.nz, a 2.4 million member Petspiration loyalty program, and a “strong own brand range” including brands such as Caribu and Glow.
This deal puts the enterprise value at $1.7 billion. Over the prior 12 months to September 2022, Petspiration generated EBITDA (EBITDA explained), which represents an enterprise value multiple of 11x.
Woolworths is expecting the transaction to achieve a mid-teens internal rate of return, with “identified value creation opportunities to support strong earnings growth.”
This purchase price will be funded by the 5.5% interest of Endeavour Group Ltd (ASX: EDV) sale.
Woolworths thinks the business is “well positioned to continue to grow strongly” as it grows its national footprint and brand.
Management commentary
The Woolworths CEO Brad Banducci said:
Specialty pet is a large and growing retail segment in which we have limited presence. We are delighted to be investing alongside founders, Shane and David Young, in Petspiration, the number two player in the segment. Specialty pet is a logical adjacency given the high penetration of pet ownership across Australia and New Zealand. The partnership will allow us to meet more of our customers’ pet family needs with a complementary range of specialty pet products and services, strengthen the Everyday Rewards loyalty program and unlock opportunities for material value creation across both businesses.
We will work together to support Petspiration’s growth through access to our retail capabilities in areas such as Digital and eCommerce, Supply Chain, Retail Media, Format and Network Development, and Advanced Analytics. We are confident that this investment will deliver a strong return on investment for Woolworths Group shareholders.
Final thoughts on the Woolworths share price
The business is more expensive than Coles Group Ltd (ASX: COL) shares. But, the business is making a number of acquisition moves, which could lead to solid earnings growth for the business. While it wouldn’t be my top defensive ASX share pick, I think it would be a solid choice for the medium-term.
