A perennial underperformer, the company underwent several strategic changes during our holding period. Catalysts for a successful turnaround, however, fizzled out, and the backdrop of UK consumer demand became an impenetrable headwind. With the departure of the CEO, few prospects of the 2Entertain joint venture's value being realised, and continuing operating losses suffered by the retail business, any upside through the impending recession appears unlikely.
Following the collapse of takeover talks with Apax, we have purchased Woolworths as we still see this as a natural target for a private equity firm. The company is naturally suffering from a decline in sales, along with the rest of the high street. However, the company is taking measures to sell underperforming assets like MVC and its failed big W stores and not only does it generate significant free cash flow but it has a meaty £100m of net cash already on the balance sheet. This gives us confidence that the company can successfully weather what we anticipate will be a torrid time for retailers, and even if we low-ball sales (far below market and management expectations) and assume continued margin decline we still believe the company can generate a healthy FCF yield of around 10% and a return on equity of around 10%. The cash on the balance sheet is more than sufficient to plug its pension deficit and the company retains all the features of a "self-funding takeover" - hence it was bought.
| Sedol |
Type |
Price |
Date |
| 3073861 |
Sell |
£ 0.048 |
22/09/2008 |
| 3073861 |
Buy |
£ 0.305 |
15/06/2006 |
| 3073861 |
Buy |
£ 0.34 |
09/11/2005 |
| 3073861 |
Buy |
£ 0.35 |
21/09/2005 |
| 3073861 |
Buy |
£ 0.37 |
29/07/2005 |
| 3073861 |
Buy |
£ 0.363 |
08/06/2005 |
| 3073861 |
Buy |
£ 0.35 |
27/05/2005 |
|
