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Wesfarmers (ASX: WES) has revealed plans to demerge its entire Coles division and turn it into a new company on the ASX.
The proposed demerger includes a national network of 806 Coles supermarkets, Coles Online, 894 liquor stores through Liquorland, Vintage Cellars and First Choice Liquor, 712 Coles Express outlets, Coles Financial Services and the chain of 88 Spirit Hotels.
While the split remains subject to shareholder and regulatory approvals, managing director Rob Scott says Wesfarmers' goal is to target higher returns from the remainder of its businesses which have stronger growth prospects.
"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," says Scott.
"We believe Coles has developed strong investment fundamentals and is of a scale where it should be operated and owned separately.
"It is now a mature and cash generative business, which is expected to have a strong balance sheet and dividend paying capacity.
"A demerger of Coles will facilitate greater focus by Wesfarmers on growth opportunities within its remaining businesses and the pursuit of value accretive transactions."
During 1H18, the Coles division accounted for around 60 per cent of the Wesfarmer's capital employed and 34 per cent of divisional earnings. Its remaining brands include Bunnings, Kmart and Officeworks.
The remaining divisions of Wesfarmers, excluding its resources portfolio, have accounted for a compounding annual earnings growth of 8.98 per cent since FY09.
Under the proposed demerger, Wesfarmers would still retain a minority interest of up to 20 per cent in the new Coles and a substantial ownership stake in flybuys.
Wesfarmers shareholders will receive shares in the new Coles business proportional to their existing Wesfarmers holdings, after accounting for shares to be retained by the company.
Current CEO of supermarkets and convenience at Metcash (ASX: MTS) Steven Cain would become the next managing director of Coles, succeeding current MD John Durkan who has held senior leadership positions in the business for 10 years.
According to Scott, Durkan made the call that it was time for a leadership change considering Coles' impending transformation.
"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 demerger," says Scott.
Durkan will remain in an advisory position following the change.
The demerger is subject to final Board approval, third party consents, and regulatory and shareholder approvals. If approved, it is expected to take place in the 2019 financial year.
Shares in Wesfarmers are up 5.12 per cent to $43.31 per share following this morning's announcement at 11.13am AEDT.
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