Wesfarmers is looking to demerge its Coles supermarket division and spin it off as a separate ASX-listed unit under a new plan from managing director Rob Scott to achieve better return on its employed capital.
In a release to the ASX on Friday morning, Wesfarmers said the decision, subject to shareholder and other approvals, follows a review of the conglomerate’s portfolio.
Scott told reporters that the demerger had been being discussed before he stepped into the top job at Wesfarmers and represented a “once in a decade” repositioning of the portfolio, reflecting his desire to free-up capital for higher return acquisitions and further investments in Bunnings Australia & New Zealand, Kmart and Target.
“As a diversified conglomerate there’s an opportunity for us to deliver a superior return,” Scott said.
Wesfarmers purchased Coles in 2007 and invested billions in turning around the business, but Scott is of the view that the supermarket chain will deliver more moderate returns in the coming years.
“What we’re trying to distinguish today is that the growth you achieve through a business turnaround is obviously a superior level of growth than what one would ordinarily expect in a more mature business,” Scott said. “It doesn’t mean the returns from Coles won’t be good, they just will be more moderate levels of return.”
As of 31 December 2017, Coles accounted for around 60 per cent of Wesfarmers’ capital employed, and 34 per cent of its group divisional earnings.
The demerger would include Coles national network of 806 stores, as well as Coles Online, 894 liquor stores, Coles Express’ 712 fuel and convenience store outlets and 88 hotels under the Spirit Hotels brand.
Scott would not be drawn on what acquisitions Wesfarmers was considering, but reiterated his intention to continue to actively manage the conglomerate’s capital.
Wesfarmers said it will maintain a stake in Coles, up to 20 per cent, but has not decided to what extent it will continue to invest at this time.
Scott said a strategic stake in Coles reflects an intention to reap the benefits of strategic alliances between the supermarket and Wesfarmers’ other businesses, particularly in the areas of digital and data.
“There are a number of areas where both Coles and other Wesfarmers businesses can collaborate for the benefit of customers in the data and digital areas,” Scott explained.
Wesfarmers would maintain a presence on the Coles board proportional to the stake it maintains in the business and is currently working on forming a board.
Management would not be drawn on the value of the Coles business, but Scott said that he’s confident a Coles float would create a new top 30 company on the ASX.
That would value Coles at more than $14 billion.
Under the demerger scheme Wesfarmers shareholders would receive shares in Coles proportional to their existing Wesfarmers holdings, taking into account shares with will be retained by Wesfarmers itself.
The timetable for the move is still uncertain, but Scott said a shareholder vote would likely either take place in the second-quarter or second-half or FY19, dependent on trading disruption considerations.
Scott said he does not anticipate shareholder opposition to the demerger.
“We’ve gone through a very considered process, with a very detailed valuation [and] we think it will be a very compelling proposition to shareholders,” he said.
Wesfarmers’ remaining operating divisions would include a number of world-class businesses and leading Australian brands, including Bunnings, Kmart, Officeworks, and its Industrials portfolio.
When asked whether the demerger would change the equation on Wesfarmers’ troubled Bunnings UK and Ireland venture in relation to a possible exit, Scott said the demerger does not change Wesfarmers’ consideration of BUKI.
Coles MD moves on
Wesfarmers also announced that Coles managing director John Durkan will step down later this year after 10-years at the helm of the supermarket chain, to be replaced by Steven Cain, who is currently the chief executive of supermarkets and convenience at Metcash.
Durkan (pictured) has been at Coles for most of its tenure under the Wesfarmers umbrella, but will now move on as the business embarks on its “next chapter”.
His replacement, Cain, will start in late September and has spent the last two-years at Metcash, but has prior experience in the UK-supermarket business as the former group managing director of Asda.
Cain has also worked at Bain & Co and UK-based retail group Kingfisher plc and was an advisor to Wesfarmers on its takeover of Coles Group in 2007 as Coles Myer’s managing director of food, liquor and fuel.
“Steven brings a wealth of experience in international and Australian retailing with organisations such as Asda, Kingfisher, Coles and Metcash,” Scott said.
“This, combined with his experience as a listed company CEO, positions Steven well to lead Coles post the demerger.”
Scott also thanked Durkan for his service at the helm of Coles.
“[Durkan] has made the call that the time is right for him to move on,” Scott said.
Durkan has agreed to provide support to Cain through the leadership transition.
“The fact that food at Coles has been in deflation for eight consecutive years is in no small part due to John’s determination to provide Australians with great quality food at great value,” Scott said.
“Under his leadership we have also seen the turnaround of Coles Liquor, a business that was in structural decline for many years, a much improved convenience offer through Coles Express, the establishment of the $50 million Coles Nurture Fund, the transformation of a number of key digital enablers across our store network, supporting the exponential growth of Redkite and SecondBite, and myriad initiatives to attract and retain great talent, including establishing one of the largest graduate programs in Australia.”
More to come…