Australia: Wesfarmers plans demerger of Coles supermarket division

16 Mar 2018 --- Australian conglomerate, Wesfarmers is planning to demerge its Coles supermarket division which is expected to create a new top 30 company listed on the Australian Securities Exchange. The demerger, which is subject to shareholder and other approvals, would create a company with leading positions in supermarkets, liquor and convenience, strong cash generation capability to underpin dividend distributions and an earnings profile which is expected to be resilient through economic cycles, according to Wesfarmers.

The move follows a review of the Wesfarmers portfolio and an assessment of the composition of its capital employed to support higher levels of future growth and total shareholder returns.

It also comes at a time of intense competition in the Australian grocery sector with competition from market leader Woolworths and discount retailers like Aldi.

Following the spin-off announcement, shares in Wesfarmers jumped more than 6 percent to AUD$43.80.

As at December 31, 2017, Coles accounted for approximately 60 percent of the Group’s capital employed and 34 percent of Group divisional earnings.

“Wesfarmers acquired Coles as part of Coles Group in 2007 and since then has successfully turned around the business and restored its position as a leading Australian retailer,” said Wesfarmers Managing Director Rob Scott.

“We believe Coles has developed strong investment fundamentals and is on a scale where it should be operated and owned separately. It is now a mature and generative cash business, which is expected to have a strong balance sheet and dividend paying capacity.”

“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.”

“A demerger of Coles will facilitate greater focus by Wesfarmers on growth opportunities within its remaining businesses and the pursuit of value accretive transactions. The capacity to act opportunistically will be retained through a strong balance sheet and a cash generative portfolio. The Group expects to retain its current strong credit ratings and the dividend policy will remain unchanged.”

Wesfarmers Chairman Michael Chaney said the demerger would extend the Group’s long history of actively managing its portfolio.

“Wesfarmers’ operating model has benefited our shareholders over the long term and will continue to provide the framework for future capital allocation decisions,” he said.

Wesfarmers also announced that Steven Cain would be the next Managing Director of Coles, succeeding John Durkan, who will step down later this year after ten years in senior leadership positions at Coles, including four as Managing Director.

Scott said Durkan had decided that it was the appropriate time for a leadership transition as Coles entered its next chapter. He will remain in an advisory capacity following the leadership change to ensure a seamless transition.

“John has made an enormous contribution to the successful turnaround of Coles under Wesfarmers’ ownership and we look forward to him continuing to lead the business as we prepare for the demerger,” Scott said.

Cain is currently Chief Executive Officer of Supermarkets and Convenience at Metcash and will bring significant local and international business experience when he joins the group.