Wesfarmers plans demerger of Coles supermarkets division
Wesfarmers is looking to set up its own future growth as its spins off grocery giant Coles to create a new, $20bn company.
Wesfarmers chief executive Rob Scott believes there is still “a lot of growth ahead” for its flagship Coles business, but the Perth-based conglomerate is seeking better growth targets for its shareholders that now exist outside the operations of the nation’s second biggest supermarket chain.
Mr Scott, detailing Wesfarmers plans to demerge its Coles grocery division to create a new top 30 company on the ASX, said the move was about “setting Wesfarmers up for the next decade’’.
Wesfarmers’ share price shot up 5.12 per cent to $43.31 in early trade following the announcement of the spin-off which, subject to shareholder and other approvals, is expected to be completed in the 2019 financial year.
The demerger, which comes amid increasing competition in the supermarket sector, will create a new stand-alone company worth as much as $20 billion.
Mr Scott calls it a “once in a decade” move.
Wesfarmers, which owns hardware chain Bunnings, department stores Kmart and Target and office-supply retailer Officeworks, said it would seek to maintain a 20 per cent stake in Coles.
Wesfarmers shareholders will receive shares in Coles proportional to their existing Wesfarmers holdings, the company said.
In addition, Wesfarmers (WES) said Metcash supermarkets chief 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.
Speaking at a press conference after unveiling the demerger plan, Mr Scott said Wesfarmers had extracted premium returns from the 10-year turnaround of Coles but that now was the time for the supermarket group to go it alone.
However, he stressed that new shareholders in Coles, which would be a new top 30 company on the ASX, would still enjoy strong returns from the company.
“When we think about growth of our businesses and growth of Coles, as I said, we still see a lot of opportunities for growth, there are many opportunities in terms of operational improvements, growth in our fresh offer, the sheer population growth of Australia, the way we continue to expand our network, innovate our offer and our digital business,’’ Mr Scott said.
“So, Coles still has a lot of growth ahead, but what we are trying to distinguish today is that the growth you achieve through a business turnaround is obviously a superior level of growth than what you would ordinary expect in a company at a mature setting.”
Mr Scott said Coles had delivered strong returns to Wesfarmers shareholders since it was bought for $19.3 billion in 2007, but those returns couldn’t be repeated in the next decade.
“Coles is a business that still has a lot of growth ahead of it, but you wouldn’t expect it to achieve the same growth rate that we achieved over the first decade of ownership given that we went through a very significant operational turnaround.
“That doesn’t mean that Coles doesn’t have growth potential, it just means that we want a higher orientation towards growth within the rest of the (Wesfarmers) portfolio.’’
Coles is one of Australia’s largest retailers, operating about 2,500 stores and employing more than 109,000 people across Australia.
The new Coles 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.
“We believe Coles has developed strong investment fundamentals and is of a scale where it should be operated and owned separately,” Mr Scott said earlier. “It is now a mature and cash generative business.”
“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.”
Coles had previously been Wesfarmers’ top earner, but it was overtaken by Bunnings in Australia and New Zealand in the company’s recent half-year result.
Wesfarmers said the earnings decline at Coles in the half year reflected planned investment in price and service, but some analysts have said that Coles has struggled to compete with chief rival Woolworths Group and new entrants like Aldi. Amazon.com, which recently launched in Australia, could eventually add a grocery component.
Wesfarmers had been focusing lately on its retail chains, agreeing in December to sell its Curragh coal mine to a US coal producer.
Wesfarmers bought UK hardware chain Homebase in recent years, but the company’s ownership of that unit has been troubled and Wesfarmers booked a major writedown on the UK and Ireland business at its half-year result last month.
Wesfarmers also announced that Steven Cain, currently chief executive of supermarkets and convenience at Metcash, which supplies the IGA supermarket brand, would be the new managing director of Coles.
He will succeed John Durkan, who will step down later this year after 10 years in senior leadership positions at the grocer.
It’s a return to Coles for Mr Cain who in 2004 was ejected as the supermarket group’s food, liquor and fuel boss after only a short stint in the role.
Mr Cain began his career with Bain & Co before moving into retail with UK retail group Kingfisher, later helping to transform supermarket chain Asda.
Later roles included CEO of FTSE100 media group Carlton Communications, managing director of food, liquor and fuel at Coles Myer, and operating director and portfolio company chairman at private equity firm Pacific Equity Partners, before joining Metcash in 2015.
He was as also an adviser to Wesfarmers on its takeover of the Coles Group in 2007.
Mr Scott said Mr Durkan had decided it was the appropriate time for a leadership transition as Coles entered its next chapter.
He would remain in an advisory capacity following the leadership change to ensure a seamless transition. Mr Scott said.
“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,” Mr Scott said.
Mr Durkan said: “After 10 years at Coles, including the past four as managing director, it’s the right time for Coles to move to a new leader prepared to commit to long-term tenure and navigate this great Australian company through the next chapter of its history.
“This is a move I first discussed with former Wesfarmers CEO Richard Goyder 18 months ago and then our new Wesfarmers CEO Rob Scott when he assumed the role.
“Proper, considered succession planning is critical for large companies and Coles is no
exception.”
With Dow Jones
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