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What you need to know about the Coles spin-off from Wesfarmers Ltd (ASX:WES)

The share price of Wesfarmers Ltd (ASX: WES) jumped after it came out of a trading halt as management provided details on the Coles Supermarket demerger.

The stock jumped 0.3% to $49.59 at the time of writing when the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index is up 0.2%.

In contrast, shares in archrival Woolworths Group Ltd (ASX: WOW) rallied 1.7% to $28.36 while grocery distributor Metcash Limited (ASX: MTS) has slumped 1.8% to $2.96 after Wesfarmers said Coles would be investing big into automation for two distribution centres.

Here’re some of the key points that investors should be aware of (assuming shareholders vote in favour of the demerger on November 15 and the company gets court and regulatory approvals):

  • Shareholders in Wesfarmers will receive one share of Coles for every one share of Wesfarmers they hold.
  • The total dividends paid (and franking) from Wesfarmers and Coles will be about the same as if the conglomerate kept ownership of Coles.
  • Coles will be a top 30 ASX company with around $2 billion in debt and can borrow another circa $4 billion from secured committed debt facilities.
  • Wesfarmers will own 15% of Coles and 50% of the rewards programme Flybuys.
  • Analysts estimate that Coles will have an enterprise value of $16 billion and $19 billion and will be priced at a 10% to 20% discount to Woolworths, according to the Australian Financial Review.
  • This implies a share price of between $14 to $15.50 for Coles when it lists on the ASX.
  • Wesfarmers paid $20 billion for Coles in 2007.
  • Coles expects to take a write-down of $130 million to $150 million before tax in FY19 from redundancies and lease exit costs for a number of distribution centres that will be closed.
  • Costs for the automation project were not disclosed but management said it is included in its net capital expenditure forecast of $600 million to $800 million.

I think this is a positive development for Wesfarmers shareholders as it will give investors the option to invest in the remaining Wesfarmers growth business and/or the more stable but low growth supermarket business.

The only potential issue is the 15% overhang from Wesfarmers. The conglomerate is probably not going to hold on to its stake in Coles and there’s nothing stopping management (at least not from what I can see) from dumping the shares soon after the demerger.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. 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 Scott Phillips.

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