Wesfarmers Limited (ASX: WES), the parent company of Coles, plans to de-merge with its subsidiary (Coles) and allow Coles to trade on ASX as a separate public company. Further, WES announced an update on Coles demerger wherein Wesfarmers’ shareholders will receive 1 Coles share for every Wesfarmers share held and it is expected to be completed by November 2018, subject to shareholder and other approvals. According to Wesfarmers, the demerger would review the entire portfolio of the parent company. However, Wesfarmers would be handling 15% stake so that there could be no problem in the strategic alignment between the parent and subsidiary. Moreover, the objective of the retention is to sustain growth path ahead in term of loyalty, digital, and data.
The decision of the demerger has been taken by considering the outlook for both the companies. According to the top management of Wesfarmers, the revamping of the entire portfolio would help in achieving robust growth for Coles and Wesfarmers. The management believes that after the spin-off, the parent company would be left with the cash generative business. In addition, Wesfarmers would also be able to generate strong returns on the capital and strong momentum could be witnessed in the markets wherein both the companies would be working.
In the coming weeks, the insights about the business model of Coles, its capital structure, CapEx, top management people would be out. As a result, in the second half of October 2018, the management of Coles would be pitching in front of the institutional shareholders. The funders have a general idea about Coles and what could be basic numbers after the listing. They are aware that the company would hit the market with the investment grade (IG) rating and with net debt of around $2 billion. Moreover, the fact that the company would shell out 90% of the NP (net profits) in the form of dividends is not hidden from the investors. From the shareholder point of view, the matter of concern is different as they are more inclined towards the outlook of the top line. In addition to this, the shareholders are working to understand how the new top management, and demerger with the Wesfarmers, would impact the top line of Coles.
The top management of Wesfarmers believes that after demerger, WES will have a cash generative portfolio with solid returns on capital and the allocation of the resources would be towards other businesses. They added that Coles is backed by the solid fundamentals and have reached a stage where the company can operate independently.
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