Wesfarmers Ltd (ASX: WES) last month decided to spin-off supermarket company Coles to become a separate ASX-listed business. The news from Wesfarmers comes after a portfolio review that showed Coles accounts for 60 percent of capital deployed in the business, while only bringing in 34 percent of earnings. Wesfarmers is therefore intending to focus its portfolio on businesses which have stronger future earnings prospects.
Wesfarmers believes that Coles is a strong enough business by itself with strong dividend-paying capacity and a solid balance sheet, however it is not growing at the rate the conglomerate would like. With Coles facing significant pressure from Woolworths, Aldi and new entrants such as Costco, Wesfarmers managing director Rob Scott has discussed the importance of finding new avenues of growth. This surely implies moving into faster growing sectors than food.
The spin-off is great news for investors. In the investment world 1+1 can often equal more than two. Coles as a separate company can have a management devoted to maintaining market share and increasing earnings, while demerging the businesses gives Wesfarmers investors greater exposure to strong performers such as Bunnings and allows them to invest money elsewhere.
For investors in Wesfarmers, this spin-off is great news.
