WES Wesfarmers Limited

   By Mike Cherney 
 

SYDNEY--Australian conglomerate Wesfarmers Ltd. (WES.AU) said Friday that it planned to spin off its key Coles grocery unit amid increasing competition in the supermarket sector.

The decision to spin off Coles, which Wesfarmers bought in 2007, comes after a review of Wesfarmers's portfolio, and the company said it reflects a new focus on businesses with the prospect of strong future earnings growth.

"A demerger of Coles will facilitate greater focus by Wesfarmers on growth opportunities within its remaining businesses," Wesfarmers Managing Director Rob Scott said.

Wesfarmers said Coles would be a top-30 company listed on the Australian Securities Exchange and that it expected the spin off to be completed in the 2019 financial year, subject to shareholder and other approvals. Wesfarmers shareholders will receive shares in Coles proportional to their existing Wesfarmers holdings, the company said.

In addition, Wesfarmers said that 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. Mr. Cain is currently chief executive of supermarkets and convenience at Metcash, which supplies the IGA supermarket brand.

Wesfarmers, which owns hardware chain Bunnings, department stores Kmart and Target and office-supply retailer Officeworks, said it would seek to maintain a 20% stake in Coles after the spin off. The new 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. "It is now a mature and cash generative business."

Coles had previously been Wesfarmers's 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 Ltd. (WOW.AU) and new entrants like Aldi. Amazon.com Inc. (AMZN), 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 U.S. coal producer. Wesfarmers bought U.K. 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 U.K. and Ireland business at its half-year result last month.

-Write to Mike Cherney at mike.cherney@wsj.com

(END) Dow Jones Newswires

March 15, 2018 18:09 ET (22:09 GMT)

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