Wesfarmers announces plans to spin off Coles supermarket

Wesfarmers has declared plans to spin off its Coles supermarket business to create one of Australia’s top-30 listed companies. Shares in the Australian retail conglomerate jumped to a six-week high on Friday following the announcement.

Wesfarmers said the decision came after a review of its complete portfolio of businesses, including retailers Officeworks, Bunnings, Kmart and its chemical and mining assets. The review focused on plans to support greater levels of future growth and total shareholder returns.

Rob Scott, managing director of Wesfarmers, said the Group was repositioning its portfolio to target a higher capital weighting towards businesses with strong future earnings growth prospects. Wesfarmers acquired Coles as part of Coles Group in 2007.

Scott noted that it has successfully turned around the business and restored its position as a leading Australian retailer since then. He added that Coles is on a scale where it should be operated and owned separately. It has developed strong investment fundamentals, and now, a mature and cash-generative business.

Coles is an attractive investment, according to Scott. "Coles will be well positioned to continue to deliver long-term earnings growth, with an earnings profile that is expected to be resilient through economic cycles,” the ABC reports him as saying.

Investment bank Credit Suisse has valued Coles and its convenience stores at about $21 billion as a standalone business.

Wesfarmers was yet to put a price on the demerger. The company said it would not completely exit the business. In fact, it would maintain a minority 20 percent stake in the spun-off business "to support strategic alignment between Wesfarmers and Coles in relation to various growth initiatives, including in the areas of data and digital.”

SBS reports Citi retail analyst Bryan Raymond as saying that the move is positive not only for Wesfarmers shareholders but also for the wider supermarket sector. "Shareholders can now gain exposure to a Wesfarmers business primarily driven by Bunnings in Australia and New Zealand," he said in a note.

Coles managing director John Durkan will be replaced by Steven Cain, the current head of Metcash's IGA division. Durkan has been on the job for four years. One of his successes was turning around Coles Liquor, which had been in structural decline then, according to reports.

By itself, Coles is one of Australia’s largest businesses. It has nearly 110,000 employees across its network of 2,500 stores.