Is Wesfarmers Ltd about to become Coles?

Industrial conglomerate Wesfarmers Ltd (ASX: WES) could be about to become a pure retail play as it spins off a number of divisions.

The company is reportedly looking to spin off its insurance broking division OAMPS, in a deal potentially worth more than $1 billion, and other divisions could be divested.

While Wesfarmers boss Richard Goyder has repeatedly defended the company’s business model, which includes several disparate businesses, including supermarket Coles, discount variety retailers K-Mart and Target, Officeworks, Bunnings, insurance, chemicals  & an energy division.

In October last year, Mr Goyder told an American Chamber of Commerce event that Wesfarmers needs to be come, ‘lean, dynamic and innovative’, to compete with global giants such as Amazon.

With the coal business, chemical, insurance and industrial safety divisions holding back the performance of the integrated Coles business, Wesfarmers may be about to transform itself into a pureplay retailer, much like main rival Woolworths (ASX: WOW).

Coles drove earnings 10.7% higher over the past six months, and continues to go from strength to strength, while Wesfarmers’ other businesses are struggling, or making minimal (compared to Coles) profits.

Wesfarmers’ may also just be looking to sell OAMPS to capitalise on the success of rival insurance brokers Austbrokers Holdings Limited (ASX: AUB) and Steadfast Group Ltd (ASX: SDF).

Steadfast’s share price is up over 16% since listing in August 2013, while Austbrokers has skyrocketed, rising 366% since listing in 2005.

Having bought OAMPS in 2006 for $700 million, Wesfarmers will make a decent profit on OAMPS, should it receive more than $1 billion, either in a trade sale, or as a standalone IPO.

Wesfarmers was recently names as one of the two best stocks in the region by Angus Tulloch, Edinburgh-based head of Asia Pacific equities for First State Stewart Super.

Mr Tulloch says improving consumer confidence will make a big difference to retailers on the front line, but will eventually flow through to most other sectors of the economy.

Foolish takeaway

A divestment of its other non-core businesses and a clearer focus on Coles and the retail side of its business could make Wesfarmers a stronger competitor to Woolworths. It could also realise value for shareholders and result in special dividends or a return of capital. One to watch.

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

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