Here’s how shares in Australian companies tend to fare following a demerger

  • Wesfarmers plans to demerge its Coles supermarket division, creating a new top 30 company listed on the ASX.
  • Macquarie Research has looked at the price performance of Australian listed companies following demergers in the past.
  • It found that, on average, shares in the spun-off entity tend to fall before recovering after six months.

A little over a decade after being absorbed into the Wesfarmers empire, Australian supermarket chain Coles looks to be spun off into a separate listed entity on the ASX.

Compared to when it was last traded back in 2007, the competition and consumer environment is now incredibly different, creating uncertainty as to what its share price may do when it starts to trade.

While that’s yet to be determined, if history is any guide, it’s shares may struggle early on.

As seen in this chart from Macquarie Research, of the 38 demergers seen in Australia since 1995, the spun-off entity has generally fallen in the short to medium term.

Source: Macquarie Bank

“The child entity typically underperforms the market for the first few weeks following the spin-off. This continues generally for a period of 6 months,” Macquarie says, adding that “it is not until 12 months after the split that the child entity typically outperforms”.

In comparison, Macquarie says the parent entity is “typically flat leading into a demerger” before matching the broader market performance following the split.

While history suggests shares in Coles may struggle early on based prior demergers, it’s only an average and does not reflect the performance of every individual split seen over the past two decades.

What it does provide is a few hints as to how shares in both Wesfamers and Coles may fare when the demerger date is finalised.