The share price of Woolworths Group Ltd (ASX: WOW) is outperforming the market today on speculation that it could be looking to spin-off assets into a new listed company.
Shares in our largest supermarket jumped 1% in late morning trade to $28.57 as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index struggled to keep its head above breakeven after the Australian Financial Review reported that several investment bankers are hoping to present the divestment idea to Woolies later this year.
Management has denied that it's considering the move that will see its gaming, hotel and liquor businesses rolled into a new entity, but that won't quell the rumours given that shedding assets is in vogue in this market.
It's archrival Wesfarmers Ltd (ASX: WES) is working on plans to divest its Coles supermarket division, while a host of other companies from Brambles Limited (ASX: BXB) to Commonwealth Bank of Australia (ASX: CBA) have also announced similar plans to sell or list non-core businesses.
Divestments are generally well received by shareholders as these transactions have historically unlocked value and I believe this is one of the reasons why shares in Wesfarmers have outperformed Woolworths by 20% in the past six months.
But Woolworths has the opportunity to excite investors if the deal stacks up. The report suggested that the group could combine its 75% ownership in pubs business ALH with its $8 billion Endeavour Drinks business that owns Dan Murphy's and BWS, to form a new ASX entity with earnings before interest, tax, depreciation and amortisation (EBITDA) of up to $1 billion a year.
Such a move will allow management to focus its resources on growing its core supermarkets business at a time of increasing competition.
Endeavour Drinks was a growth engine for Woolworths, but the retail liquor market has reached saturation with the business now controlling around half the market and earnings growth slowing to CPI-like levels.
It's too early to say if the ALH/Endeavour spin-off will happen, let alone if it will take the shape of an initial public offer (IPO) or an in-specie offer where existing shareholders will be entitled to a proportionate number of shares in the new company based on their existing Woolworths' holdings.
Management is probably too busy to think about this at the moment when it is still in the process of flogging off its petrol station business after the competition watchdog blocked BP from buying the assets.
Nonetheless, investors should keep an eye on the stock even though I prefer the outlook of Wesfarmers over Woolworths at the moment after the former delivered an impressive profit result last month.
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