The decision by Wesfarmers Ltd (ASX: WES) to spin-off its Coles supermarket chain through a $19 billion demerger has captured the imagination of investors but this may not be the only asset that the unwieldly conglomerate may shed over the next year or so.
There is speculation that Wesfarmers could also sell its pubs business with the Australian Financial Review reporting that private equity group KKR is running the ruler over the business.
Such a bid would come at an opportune time after the share price of Wesfarmers surged by over 6% last week after management revealed plans to hive-off its Coles division into a separately-listed ASX entity but retain a 20% stake.
The 20% stake is more an overhang if you ask me and I think a clean break would be a better outcome for the new Coles shareholders – but I digress.
The AFR reports that KKR has long been interested in Wesfarmers' pubs and that they could be worth as much as $400 million thanks mainly to its Queensland-based pub operations.
Queensland's liquor licensing laws require anyone who owns a bottle shop to hold a pub license and KKR is keen to expand after buying Bruce Dixon's pub group, now called The Australian Venue Company.
Wesfarmers may also be a willing seller as management has expressed reservations about owning and operating poker machines at the 90 hotels it runs.
Arch-rival Woolworths Group Ltd (ASX: WOW) has similar exposure to pubs and pokies through its investment in Australian Leisure and Hospitality.
The main sticking point for Wesfarmers is its pub leases, which are owned by Hotel Properties Investments Ltd (ASX: HPI), according to the AFR.
But a deal with KKR could see Wesfarmers sell its pubs and lease liabilities to The Australian Venue Company where Coles then leases back the bottle shops that can be included in the spin-off (although I don't think the Liquorland business is really much of a growth driver for the group).
There could be more than one suitor out there for Wesfarmers' pubs business that are willing to entertain such a deal too.
I think the market could get excited about the sale of Wesfarmers' pubs division, although I am not sure if the proceeds will be handed back to shareholders via a capital return. Management may want to use the cash to pay down debt to get Coles' balance sheet in better shape for the spin-off.
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