Woolworths Limited (ASX: WOW) has today announced that it is going to sell or wind up its home improvement business – in what might be a shock to some but likely welcomed by shareholders.

In early trading, Woolworths’ share price has risen 3.7% to $23.50.

Woolworths chairman Gordon Cairns noted in the announcement today, “Our recent review of operating performance indicates it will take many years for Masters to become profitable. We have determined we cannot continue to sustain ongoing losses from this business“, and added,”…we intend to pursue an orderly prospective sale or wind-up of the business“.

The home improvement business is 33.3% owned by US hardware giant Lowes, which had an option to sell its share to Woolworths after October 2015 for a yet-to-agreed value. At the end of June 2015, Woolworths value that stake at $886.5 million – and the whole home improvement business at $2.8 billion, but with Masters losing money, what the company ends up paying for Lowes’ stake could be higher or lower than $886.5 million.

The options process will take at least two months to complete, after which Woolworths will consider a potential sale process or another exit process.

Woolworths is also likely to take a writedown on the $2.8 billion carrying amount of the home improvement business, which I expect will be announced when the company reveals its first half of the 2016 financial year results in February.

However, the sale or closure of the home improvement business will also mean no more losses from that business, which has been a drag on the company’s overall earnings. The home improvement division has generated $629.3 million worth of losses at an earnings before interest and tax (EBIT) level, including a loss of $224.7 million last financial year. The end of Masters should automatically add an additional $200 million of earnings to Woolworths in future years, although there will likely be some substantial expenses if the company is forced to close Masters down.

A sale of the business or even splitting it up and selling off parts is likely to be the best option for Woolworths. Masters is only half of Woolworths’ home improvement business, with Home Timber & Hardware generating $20.9 million in EBIT last financial year which was up from $7 million in 2014.  Masters reported an EBIT loss of $245.6 million in the 2015 financial year.

Home Timber & Hardware is more of a wholesaler, and may be valuable to Mitre 10 – owned by Metcash Limited (ASX: MTS), which itself is a wholesaler/distributor.

Bunnings, owned by Wesfarmers Ltd (ASX: WES) is reported to be interested in at least 15 Masters sites – of which there were 58 at the end of June 2015. Woolworths owns many of its Masters sites, which could also be very valuable as property prices have increased.

Foolish takeaway

Woolworths will incur some one-off expenses from buying out Lowes, possible writedowns associated with the value of the business and expenses if it is forced to closed down Masters if it can’t find a willing buyer. Offsetting that is the positive improvement from no more EBIT losses and potential to realise some value from the sale of Masters and/or Home Timber & Hardware businesses.

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Motley Fool writer/analyst Mike King owns shares in Wesfarmers and Woolworths. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.