Market abuzz with Woolies-Absa talk

Market speculation has it that Absa is in talks with retailer Woolworths with a view to buying up its financial services division.

But Absa said yesterday that though it had been in talks with many retailers in the past year, it had not concluded any deals.

The food and clothing retailer said on Friday it was in negotiations that could affect its share price, an announcement that sent its stock up to close almost 9% higher. Talk has been that Woolworths is either being bought out, or is selling off its financial services business.

Absa was believed to have lodged an application with the Reserve Bank to purchase a debtors' book from one of the retailers, but this could not be confirmed.

Syd Vianello, an analyst with Nedcor Securities, said Woolworths could be looking into a joint venture with one of the big four banks, but it was “too early to say”.

He said Absa was the most likely contender as it was keen to get into consumer finance, which the bank saw as a big growth area.

Vianello said the bank had previously tried to enter this sector, but 14 months of talks with JD Group had not resulted in a deal.

Patrick Wadula, Absa's head of media relations, said the company had been in talks with a number of retailers over the past year to seek synergies in the retail environment. He said nothing had been concluded and the bank was “still shopping around”.

Woolworths said it had “nothing further to add” to Friday's cautionary.

In August, Woolworths said it had experienced a “tougher collections environment” in the year to June. Financial director Norman Thomson said profitability in the financial services division had “gone backwards”.

Warwick Lucas, an analyst with Imara SP Reid, said Woolworths was a cheap share and presented a good opportunity at an attractive price as the sector continued to weaken.

He said it seemed that the market had discounted Woolworths stock because of the perceived cyclical risk in its clothing division.

Chris Gilmour, an analyst with Absa Asset Management Private Clients, said it was possible that a private equity company was looking at Woolworths as interest rates were expected to start coming off in the near future.

In addition, Woolworths was among the cheapest shares in its sector if one compared its price:earnings ratio to its peers such as Pick n Pay.

Vianello said it was unlikely that a private equity firm was looking at Woolworths as there was not as much liquidity in the market as previously.

Gilmour said another contender could be the UK retailer Marks and Spencer, which had had a relationship with Woolworths for more than 50 years.

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