SYDNEY (Reuters) - Australian conglomerate Wesfarmers Ltd (WES.AX) said the capital it frees from spinning out its low-growth supermarket division, Coles, will be first used to improve existing businesses before it makes acquisitions or buys back stock.
In the first detailed financial statement about the demerger, Wesfarmers put the one-time cost to spin off Coles at A$148 million ($104 million) but the disclosure also buttressed Wesfarmers’ rationale for shedding the grocer to seek fatter margins elsewhere.
“The demerger will significantly reposition Wesfarmers’ capital towards businesses with higher future earnings growth prospects,” Rob Scott, the company’s managing director told analysts on a conference call.
“These growth opportunities start with investments in Wesfarmers existing portfolios of businesses,” he said, adding he would be “patient and discerning” about potential purchases and “comfortable returning excess capital to shareholders”.
Perth-based Wesfarmers in March announced plans to spin off Coles into a listed entity, estimated to be worth about A$16 billion, amid the biggest revamp of its portfolio in years.
Coles consumed almost two thirds of Wesfarmers’ capital employed in the year to June 30 and only contributed about a third of its earnings.
The conglomerate, which also owns department stores, a stationer, investment bank and a chemicals division, also agreed this year to sell its last remaining coalmine and quit a disastrous foray into British hardware.
Without Coles, a slimmed-down Wesfarmers would earn less than half as much revenue, according to pro-forma figures for 2018 that the conglomerate published on Friday.
The company reported 2018 results last month, which showed Coles earnings dropped, lagging its rival Woolworths Group Ltd (WOW.AX), but divisions that form the core of Wesfarmers’ future performed well.
According to an analysis Wesfarmers’ commissioned from corporate advisory firm Grant Samuel and released on Friday, that would lift Wesfarmers returns on capital from 16.8 percent with Coles to 25.7 percent without the grocer.
Coles, meanwhile, is headed for a supply chain revamp and fewer but deeper discounts, Wesfarmers said, after a years-long price war with Woolworths and foreign rivals ALDI Inc [ALDIEI.UL] and Costco Wholesale Corp (COST.O) has shrunk margins.
“(I) expect WES to get more aggressive on M&A post-demerger,” James Power, portfolio manager at Wesfarmers shareholder Martin Currie Australia said in an email, referring to the company by its stockmarket ticker.
The deal will be put to a shareholder vote after Wesfarmers’ annual general meeting on Nov. 15 and, if approved, Coles shares will begin trading on Nov. 22, Wesfarmers said.
The demerger details were released after market hours on Friday. Wesfarmers shares closed 0.3 percent higher during regular trading hours while the broader market rose 0.15 percent.
Reporting by Tom Westbrook in SYDNEY. Additional reporting by Nikhil Kurian Nainan and Aditya Soni in Bengaluru, Editing by Himani Sarkar and Vyas Mohan