Wesfarmers to spin-off grocery giant Coles

Investors have welcomed today's news that Wesfarmers plans to spin-off supermarket giant Coles and create a separately listed business that would rank among the 30 biggest on the Australian stock market.

The Perth-based conglomerate plans to retain a 20 per cent stake in the new business, and managing director Rob Scott said the move would allow it to focus on its other businesses and give it the capacity to make future acquisitions.

Coles accounts for 34 per cent of Wesfarmers' earnings but 60 per cent of its employed capital.

"A demerger of Coles will facilitate greater focus by Wesfarmers on growth opportunities within its remaining businesses and the pursuit of value accretive transactions," Mr Scott said on Friday.

"The capacity to act opportunistically will be retained through a strong balance sheet and a cash generative portfolio."

Metcash supermarkets chief executive Steven Cain will replace John Durkan as managing director of Coles later this year, with the demerger and listing set for completion in the 2019 financial year, subject to shareholder and regulator approval.

Wesfarmers shareholders will receive shares in Coles proportional to their existing Wesfarmers holdings, after taking into account shares to be retained by Wesfarmers.

Wesfarmers said retaining a minority stake in Coles would support strategic alignment between the two companies in relation to various growth initiatives, including in the areas of data and digital.

Wesfarmers also plans to retain a substantial ownership stake in flybuys to support continued access to the loyalty program and continued investment in data analytics capabilities.

The demerger proposal comes 11 years after Wesfarmers completed the transformational acquisition of struggling Coles group, in Australia's largest takeover.

Under Wesfarmers' ownership, Coles was the market leader for nearly a decade, but in recent times it has been outpaced by Woolworths in crucial comparable food sales growth as its rival supermarket giant slashed prices.

Mr Scott said Coles still represented an attractive investment.

"It is now a mature and cash generative business, which is expected to have a strong balance sheet and dividend paying capacity," he said.

"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."

The spin-off would include 806 supermarkets, Coles Online, 894 Liquorland, Vintage Cellars and First Choice Liquor stores, 712 Coles Express fuel and convenience stores, a general insurance and credit cards business, and 88 Spirit Hotels, mainly in Queensland.

It would have Ebit of $1.6 billion (based on 2017 data) and about 109,000 staff.

Wesfarmers would be left with its Bunnings hardware stores, Target, Kmart, Officeworks and an industrials portfolio.

It would have Ebit of $2.4 billion, with about half coming from Bunnings, and about 114,000 staff.

The demerger plan comes shortly after Wesfarmers was hit by big write-downs relating to Bunnings' foray into the UK and Ireland; the group had $1.02 billion of impairments and an 86.6 per cent drop in first-half profit.

Wesfarmers shares closed 6.3 per cent higher today at $43.79 while Metcash, which announced that senior executive Scott Marshall would replace Mr Cain, lost 5.4 per cent to $3.00.