Coles Entered Into An Incorporated Joint Venture With Australian Venue Co.

Australia’s leading retailer, Coles Group Limited (ASX:COL) has agreed to enter into an incorporated joint venture with a wholly owned subsidiary of Australian Venue Co. Limited (AVC) in relation to Coles’ hotels business, Spirit Hotels. The established Joint venture company will be called ‘Queensland Venue Co’ and both Coles and AVC will have an equal number of shares in it. It is expected that this Joint venture will help both the companies in expanding their own businesses in Queensland while focusing on their core competencies.

Despite the release of this news, the share price of Coles is down by 0.439% in the intraday trade as on 5 March 2019 (AEST 1:09 PM).

AVC is an experienced owner and operator of a diverse portfolio of pubs/hotels, bars and restaurants and moreover, it has a successful track record of acquiring and integrating venues to improve their operational performance and customer offering. Due to the strong reputation and experience of AVC in the Hotel managing business, Coles has selected it to be its Joint Venture Partner. Under the Joint Venture, AVC is going to manage the day-to-day operations of Spirit Hotels business and Coles will manage the day-to-day operation of the Retail Liquor business. Both the parties will receive full economic benefit of the businesses that they are managing. Further, AVC is having plans to expand the hotel portfolio in Queensland which will allow Coles to further expand its Retail Liquor business in that state.

Currently, Coles’ Spirit Hotels business is comprised of 87 hotels, 76 of which are located in Queensland and its Retail Liquor business is comprised of 253 retail liquor stores out of which 243 are located in Queensland.

On completion of the transaction, Coles is expected to receive around $200 million in proceeds which will lead to an associated book loss on sale of around $20 Mn. The net impact on the Liquor segment had the transaction been in place for 12 months ended 30th December 2018 would have been a reduction of both revenue of ~$300 million and EBIT of $13 million.

Currently, the transaction is subject to certain conditions, which include receiving consent from a small number of landlords. The relevant liquor and gaming authorities in Queensland, South Australia and Western Australia have already indicated they are having no objections with the structure.

While commenting on the agreement, Coles’ CEO Steven Cain informed that the agreement with AVC will enable both the companies to bring relevant expertise to the joint venture. He further informed that in the last 12 months the company has undertaken an extensive review of its Spirit Hotels business to find out a suitable partner.

It is expected that the transaction will close prior to the end of FY 2019. Coles recently got demerged from Wesfarmers Limited (ASX: WES) and it’s been trading on ASX for few months now. In the last three months, the share price of Coles decreased by 0.78% as on 4 March 2019. COL’s shares is trading at $11.350 with a market capitalization of circa $15.21 billion as on 5 March 2019 (AEST 12:20 PM).