Wesfarmers’ shares up on demerger proposition

ColesWesfarmers’ share price has shot up over 6 per cent in Friday trading, as investors and analysts reacted positively to the decision to spin off its supermarket chain Coles into a separate ASX-listed entity.

The retail conglomerate’s managing director Rob Scott told reporters on Friday that the demerger had been being discussed before he stepped into the top job at Wesfarmers and represented a “once in a decade” repositioning of the portfolio. He said the spin off reflected his desire to free-up capital for higher return acquisitions and further investments in Bunnings Australia & New Zealand, Kmart and Target.

“As a diversified conglomerate there’s an opportunity for us to deliver a superior return,” Scott said.

Wesfarmers purchased Coles in 2007 and invested more than $8 billion in turning around the business, but Scott is of the view that the supermarket chain will deliver more moderate returns in the coming years.

“What we’re trying to distinguish today is that the growth you achieve through a business turnaround is obviously a superior level of growth than what one would ordinarily expect in a more mature business,” Scott said.

“It doesn’t mean the returns from Coles won’t be good, they just will be more mod berate levels of return.”

The demerger, slated for fiscal 19, would include Coles national network of 806 stores, as well as Coles Online, 894 liquor stores, Coles Express’ 712 fuel and convenience store outlets and 88 hotels under the Spirit Hotels brand.

As of 31 December 2017, Coles accounted for around 60 per cent of Wesfarmers’ capital employed, and 34 per cent of its group divisional earnings.

Post demerger Citi analysts anticipate that the strong performing Bunnings Australia & New Zealand (BANZ) business would become around 58 per cent of earnings.

Citi analysts said the move was a positive development for Wesfarmers that would increasingly expose shareholders to the company’s star performer, BANZ and open the door to acquisitions.

“Demerging the capital intensive Coles businesses creates an opportunity for Wesfarmers to accelerate acquisitions, likely to be a domestic industrial business, in our view,” Citi analyst Bryan Raymond said.

“This decisive action on Coles indicates the management team and board are able to move quickly and will likely be decisive around Bunnings UK & Ireland (BUKI) as well.”

Scott said on Friday that the decision to spin off Coles would have no bearing on whether Wesfarmers would rollback its investment in the troubled BUKI venture.

Citi valued the Coles business at $18 billion, which would place an ASX-listed spin off well within the top 30 companies on the ASX.

Scott would not be drawn on what acquisitions Wesfarmers was considering, but reiterated his intention to continue to actively manage the conglomerate’s capital.

Wesfarmers said it will maintain a stake in Coles, up to 20 per cent, but has not decided to what extent it will continue to invest at this time.

Scott said a strategic stake in Coles reflects an intention to reap the benefits of strategic alliances between the supermarket and Wesfarmers’ other businesses, particularly in the areas of digital and data.

“There are a number of areas where both Coles and other Wesfarmers businesses can collaborate for the benefit of customers in the data and digital areas,” Scott explained.

Wesfarmers would maintain a presence on the Coles board proportional to the stake it maintains in the business and is currently working on forming a board.

Under the demerger scheme, Wesfarmers shareholders would receive shares in Coles proportional to their existing Wesfarmers holdings.

The timetable for the move is still uncertain, but Scott said a shareholder vote would likely either take place in the second-quarter or second-half of FY19, dependent on trading disruption considerations.

Scott said he does not anticipate shareholder opposition to the demerger.

“We’ve gone through a very considered process, with a very detailed valuation [and] we think it will be a very compelling proposition to shareholders,” he said.

Wesfarmers’ remaining operating divisions would include Bunnings, Kmart, Officeworks, and its Industrials portfolio.

When asked whether the demerger would change the equation on Wesfarmers’ troubled Bunnings UK and Ireland venture in relation to a possible exit, Scott said the demerger does not change Wesfarmers’ consideration of BUKI.

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