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business

Australia’s Wesfarmers to Spin Off Coles Supermarket Chain

Updated on
  • New company will be among top 30 on Australian stock exchange
  • Move allows Wesfarmers to focus on faster-growing businesses

Wesfarmers Ltd. plans to spin off its Coles supermarket, liquor and convenience stores, 11 years after buying the business in one of Australia’s biggest takeovers. The stock surged the most in more than eight years.

The mining-to-home improvement conglomerate plans to retain a minority stake of up to 20 percent of Coles after the spinoff, the Perth-based company said in a statement Friday.

Read more: Key details of Wesfarmers plan to spin off Coles

The move comes after Wesfarmers’ first-half net income slumped 87 percent to A$212 million ($165 million), dragged down by charges on its foray into U.K. home improvement stores and a decline in earnings at Coles, which has been losing out to rival supermarket Woolworths.

Tables Turn

Coles grew sales faster than Woolworths for years. Now the reverse is the case

Source: Company reports

Note: Based on sales from stores open at least 12 months, adjusted for the timing of Easter. Woolworths has stopped reporting comparable food & liquor sales growth as a combined metric so both "food & liquor" and "food only" are shown.

The spinoff will allow Wesfarmers to target faster-growing businesses, Managing Director Rob Scott said in the statement.

The Rationale

Coles got more than half of Wesfarmers' capital, produced a third of earnings

Source: Company filings

“With the pressure on earnings, the increased competition, the structural changes in the industry it was a no-brainer in investment strategy terms for Wesfarmers to sell Coles,” Michael McCarthy, chief market strategist at CMC Markets in Sydney said by phone. “The only criticism I can make of this is that it’s a little too late. Eighteen months ago would have been the prime time to spin it off.”

Wesfarmers shares surged as much as 6 percent in early Sydney trading, the biggest intraday gain since Oct. 23, 2009. The stock was up 5.7 percent to A$43.55 at 10:19 a.m. local time.

Coles had A$39.2 billion in revenue in fiscal 2017, and earnings before interest and tax of A$1.6 billion. The newly-listed company will employ about 109,000 staff across 2,500 stores, and will be one of the 30 biggest by market value on the Australian Securities Exchange, Wesfarmers said.

Coles food, liquor and convenience stores are valued at about A$21 billion, Credit Suisse Group AG analysts said in a note published Thursday.

The newly-created company will be run by Steven Cain, who will replace John Durkan when he steps down later this year, Wesfarmers said. Cain advised Wesfarmers on its 2007 acquisition of Coles, where he had previously been managing director of food, liquor and fuel.

If approved, the spinoff is expected to be completed in fiscal 2019.

Wesfarmers will retain discount department store chains Kmart and Target, and office products supplier Officeworks. It also owns Bunnings, Australia’s largest chain of home improvement stores.

— With assistance by Emily Cadman, Matthew Burgess, and Perry Williams

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