Photo by Quinn Rooney/Getty Images

Wesfarmers plans to demerge its Coles supermarket division.

The move would create a new top 30 company listed on the ASX, holding about 34% of Wesfarmers’ earnings, with about $39.2 billion in revenue and EBIT (earnings before interest and tax) of $1.6 billion.

Wesfarmers plans to keep a minority ownership interest of up to 20% in Coles and a substantial ownership stake in the supermarket chain’s loyalty program, flybuys.

Shareholders, if they approve the demerger, would be issued new shares in Coles proportional to their existing stake.

In early trade, Wesfarmers shares were up 5.5% to $43.48, giving the company a market cap of about $49 billion. Coles would be worth between $16 billion and $19 billion of that.

“Wesfarmers acquired Coles as part of Coles Group in 2007 and since then has successfully turned around the business and restored its position as a leading Australian retailer,” says Wesfarmers managing director Rob Scott.

“We believe Coles has developed strong investment fundamentals and is of a scale where it should be operated and owned separately.

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

Coles has been lagging its main competitor Woolworths in sales growth. For Woolworths, Australian food sales rose by 4.9% for the latest half year. Coles managed 1.9%.

In the latest half year results, Coles’ EBIT (earnings before interest and tax) fell 14.1% to $790 million for the half. Revenue was weaker at $19.98 billion, down 0.4%.

Coles employs more than 109,000 people through a national network of 2,5001 stores and through online platforms.

Here’s how Wesfarmers and its new spin-off, Coles, would look after the demerger:

Source: Wesfarmers

Scott says Coles has developed strong investment fundamentals and is of a scale where it should be operated and owned separately.

“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,” he says.

Wesfarmers also announced that Steven Cain will be the next managing director of Coles, taking over from John Durkan, who will step down later this year after 10 years in senior leadership positions. Cain is currently chief executive officer of Supermarkets and Convenience at Metcash.

Post a demerger, Wesfarmers would have a greater focus on growth opportunities within its remaining businesses and the pursuit of acquisitions.

“The capacity to act opportunistically will be retained through a strong balance sheet and a cash generative portfolio,” says Scott.

Wesfarmers would be left with Bunnings, Kmart, Officeworks, and its Industrials portfolio.

Wesfarmers Chairman Michael Chaney says the demerger extends the group’s long history of actively managing its portfolio.

“Wesfarmers’ operating model has benefited our shareholders over the long term and will continue to provide the framework for future capital allocation decisions,” says Chaney.

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