Wesfarmers spun off Coles in 2018 in the largest demerger in Australian corporate history, retaining a 15% shareholding in Coles at the time of the demerger.
In February this year, Wesfarmers sold off 4.9% of shares in Coles for $1,050 million, retaining a 10.1% interest in the supermarket conglomerate. That made Wesfarmers the second largest shareholder in Coles, with HSBC Custody Nominees (Australia) Limited holding a (then) 20.13% stake.
Late yesterday, Wesfarmers announced its intention to sell another 5.2% of issued capital in Coles, leaving it with a stake of 4.9%. Coles shares have performed well throughout the current coronavirus-induced market turmoil. After hitting a low of $14.21 at the end of February, shares have bounced back and closed yesterday at $16.82. The supermarket chain has benefited from panic buying along with Woolworths Group Ltd (ASX: WOW).
Wesfarmers shares falter
Wesfarmers shares have not performed as well, falling 23% from a February high of $46.94 to $35.89 yesterday, following an 11.29% surge yesterday. Wesfarmers was forced to close 25 Kmart stores in New Zealand from 25 March for a period of 4 weeks as a result of government directives. Wesfarmers’ 53 Bunnings stores in New Zealand remain open to trade customers but are closed to the general public.
Commentators have questioned whether similar measures could be enacted in Australia, which could cause Wesfarmers to have to close its Bunnings, Target, Kmart, and Officeworks stores. Wesfarmers Managing Director Robb Scott said events of the last few weeks have highlighted the importance of balance sheet flexibility to support the company in a range of economic circumstances.
Attractive return for shareholders
“We have been pleased with the performance of Coles since the demerger and the very important role that Coles is providing, and will continue to provide, to Australian households during the COVID-19 crisis,” Mr Scott said. “This divestment crystallises an attractive return for shareholders since the demerger and further enhances Wesfarmers’ strong balance sheet position.”
As part of the transaction, Wesfarmers has agreed to retain its remaining shares in Coles for at least 60 days from completion of the sale. With Wesfarmers’ stake in Coles now falling below 10%, the relationship deed agreed at the time of the demerger will terminate and Wesfarmers will no longer have the right to nominate a director to the Coles board. Wesfarmers and Coles will continue their flybuys joint venture, with both groups retaining a 50% interest in the business.
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Motley Fool contributor Kate O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of 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.