The Woolworths Group Ltd (ASX: WOW) share price jumped 3.4% yesterday on the news that the company intends to split off its drinks and pubs businesses into a separate entity by the end of next year. This jump caps off a solid year for Woolworths shares, with the shares now up almost 17% for the year so far. So with this new entity news for Wooolworths, are WOW shares a buy today?
What does this demerger mean?
Woolworths Group is currently made up of several divisions. The largest of course is Woolworths Supermarkets, which owns 995 stores around the country and also includes the FoodCo and Woolworths Metro brands (which are slightly more upmarket offerings) and WooliesX, which houses Woolworths' future-orientated projects such as home delivery and on-demand offerings.
Woolworths also owns the Big W chain of discount stores as well as Endeavour Drinks and ALH Hotels, who are the subject of the spin-off announcement. Endeavour Drinks encompasses the BWS and Dan Murphy's bottle shop chains and ALH is a group that operates a network of pubs around the country.
According to Woolworths, the merger and spin-off of Endeavour and ALH will "create Australia's largest integrated drinks and hospitality business with sales of approximately $10 billion and EBITDA of $1 billion." The two businesses are already partly integrated, and Woolworths clearly sees further benefits from further synergy.
It is initially unclear what the spin-off will look like exactly, with Woolworths stating that it will be a "demerger or other value-accretive alternative." Woolworths shareholders may end up with new shares or it could be sold on the private market.
What will the 'new' Woolworths look like?
The demerger will reduce the scope of the Woolworths stable and this may be a good thing. Running supermarkets is what Woolworths is best at, so management clearly thinks that the company should play to its strengths. If this split goes ahead, it will bring Woolworths closer to the business model of arch-rival Coles Group Ltd (ASX: COL), which has a narrower portfolio of food and drinks businesses than Woolworths at the present time.
Foolish takeaway
Woolworths shares were already expensive (in my opinion) and yesterday's pricing reaction doesn't help. Woolworths is a solid company with a solid future, but it currently trades with a price-to-earnings ratio of over 27.6, which is very high for a supermarket staples business and doesn't reflect the tough market that Woolworths is competing in. I will be sitting this one out.
