WOW Woolworths Group Limited

By Mike Cherney

SYDNEY-Australian conglomerate Wesfarmers Ltd. on Friday laid out plans for the biggest spinoff in Australian corporate history: a listing of its Coles supermarket chain with a potential value of as much as US$15 billion.

Wesfarmers shares rose more than 6% after the announcement, suggesting investors agreed it is a good time for the company to reduce its grocery exposure after acquiring Coles in 2007. Australia's supermarket sector, long dominated by Coles and chief rival Woolworths Group Ltd., has attracted foreign competition from German discount brand Aldi and others recently, and there is speculation Amazon.com Inc. could eventually sell groceries here.

The largest spinoff previously in Australia was in 2015 when BHP Billiton Ltd. unloaded what is now South32 Ltd., and was valued at about US$9 billion at the time, according to Dealogic.

Wesfarmers could retain a minority stake of up to 20% in Coles. But the company said the spinoff would allow it to focus on businesses that have more growth potential. Wesfarmers also owns the Bunnings hardware chain, Target and Kmart discount department stores, office-supply chain Officeworks, as well as coal-mine assets and chemical and fertilizer businesses.

Managing Director Rob Scott told reporters on a conference call that superior returns at Wesfarmers's other businesses "doesn't mean the returns from Coles wouldn't be good returns, they just will be more moderate." Since 2009, Coles has grown earnings before income and tax at a 9.5% annual rate, though Wesfarmers has invested eight billion Australian dollars (US$6.2 billion) into the business over the years.

Wesfarmers said Coles would be a top-30 company listed on the Australian Securities Exchange and that it expected the spinoff to be completed in the 2019 financial year. Wesfarmers shareholders will receive shares in Coles proportional to their existing Wesfarmers holdings. The new company would include more than 800 supermarkets nationally, as well as liquor stores, Coles Express convenience stores, a financial-services unit and hotel chain Spirit Hotels.

The spinoff is still subject to shareholder and other approval, and on a conference call with reporters, Mr. Scott said Wesfarmers would be open to a bid for Coles from a private-equity firm or other buyer. He didn't suggest, however, that a bid had been received.

Daniel Mueller, a portfolio manager and analyst at Wesfarmers shareholder Vertium Asset Management, said the spinoff is a "bit of a masterstroke by management," saying Coles appears undervalued compared with Woolworths.

Woolworths's market capitalization was A$34.5 billion as of Thursday's close, compared with A$46.7 billion for Wesfarmers.

"We've always argued that Wesfarmers is very difficult to value given the conglomerate nature of it," said Jun Bei Liu, deputy portfolio manager at Tribeca Investment Partners, another Wesfarmers shareholder. She said the spinoff is a pretty good strategy move.

Coles, which counts for about a third of Wesfarmers's current earnings, previously was the company's top earner, but was overtaken by Bunnings in Australia and New Zealand in its recent half-year result. Wesfarmers said the earnings decline at Coles in the half year reflected costs from investing in the business during the previous financial year, and that food and liquor revenue had in fact increased.

Wesfarmers had been focusing lately on its retail chains, agreeing in December to sell its Curragh coal mine to a U.S. coal producer. Not all its retail forays have been a success. Wesfarmers recently bought U.K. hardware chain Homebase and booked a major write-down on that unit, now called Bunnings U.K. and Ireland, in its half-year result last month. Mr. Scott told reporters that spinning off Coles shouldn't affect the company's ability to absorb weakness elsewhere, such as the Bunnings U.K. unit, which the company has placed under review.

"The intent to demerge Coles has no bearing at all on what we do" with Bunnings U.K., Mr. Scott said.

Also Friday, Wesfarmers said that Steven Cain would be the new managing director of Coles, succeeding John Durkan, who will step down later this year after 10 years in senior leadership positions at the grocer. Mr. Cain is currently chief executive of supermarkets and convenience at Metcash, which supplies the IGA supermarket brand.

Write to Mike Cherney at mike.cherney@wsj.com

(END) Dow Jones Newswires

March 16, 2018 01:13 ET (05:13 GMT)

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