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Woolworths share price higher after announcing $10 billion demerger plans

In morning trade the Woolworths Group Ltd (ASX: WOW) share price has pushed higher after the conglomerate provided an update on its drinks and hospitality businesses.

At the time of writing the Woolworths share price is up 1.5% to $33.42.

What did Woolworths announce?

Hot on the heels of the Coles Group Ltd (ASX: COL) demerger from Wesfarmers Ltd (ASX: WES), Woolworths is planning a demerger of its own.

According to the release, Woolworths has signed an agreement to combine its Endeavour Drinks and ALH Group businesses into a single entity which is expected to be referred to as Endeavour Group Limited.

Following the combination, the company intends to pursue a separation of the business through a demerger or other value-accretive alternatives. The separation is expected to take place in calendar year 2020.

Woolworths’ chairman, Gordon Cairns, said: “The Board believes that a merger of Endeavour Drinks and ALH followed by a separation, is in shareholders’ best interests and will benefit customers and team members of both groups. The decision has been taken after consideration of the future prospects of both businesses and how they can be best realised. It reflects the Board’s focus on maximising long-term shareholder value.”

This view was echoed by Bruce Mathieson Senior from its ALH Group joint venture partner, Bruce Mathieson Group.

He said: “Woolworths Group and BMG have enjoyed a long and successful partnership in ALH since 2004 which has created significant value for both sets of shareholders. This transaction is the natural evolution of the partnership and will allow Endeavour Drinks and ALH to reach their full potential. We look forward to continuing the partnership for many years to come.”

Bruce Mathieson Group has agreed to swap its interest in ALH Group for a 14.6% stake in the combined Endeavour Group and will maintain board representation in the event that a demerger becomes effective.

What’s next for Woolworths?

Management believes the separation will allow Woolworths to benefit from a simplified organisational structure, a greater focus on its core food and everyday needs markets, and opportunities to continue to build out its retail ecosystem.

It will also allow Endeavour Group to realise its full potential through business simplification and efficiencies with greater access to capital to pursue investment and growth, while retaining the benefits from a strong partnership with Woolworths.

What will Endeavour Group include?

If the merger of Endeavour Drinks and ALH Group goes ahead, it will create Australia’s largest integrated drinks and hospitality business with sales of approximately $10 billion and EBITDA of $1 billion.

It will comprise over 1,500 BWS and Dan Murphy’s retail drinks outlets, 327 ALH hotels, Pinnacle Drinks, Langton’s, Cellarmasters, and an 8.7% stake in ALE Property Group (ASX: LEP).

Judging by the share price reaction, investors appear to believe these plans could add value for shareholders and have been buying shares today.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. The Motley Fool Australia owns shares of ALE Property Group. 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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