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Why the Coles share price is down 8% today

The Coles Group Ltd (ASX: COL) share price is one of the worst performers on the S&P/ASX 200 Index (ASX: XJO) on Tuesday.

In afternoon trade the supermarket giant’s shares are down 8.5% to $15.38.

Why is the Coles share price sinking lower?

The catalyst for today’s share price weakness was news that conglomerate Wesfarmers Ltd (ASX: WES) is trimming its stake in the supermarket operator.

According to the release, this morning Wesfarmers has agreed to sell down its Coles stake from 10.1% to 4.9%.

This is the second major sale of shares the company has made over the last six weeks. In the middle of February Wesfarmers offloaded a 4.9% stake in the company for $1.1 billion.

On this occasion, Wesfarmers sold its 5.2% stake for $15.39 per share or a total consideration of $1,060 million. The company expects to recognise a pre-tax profit on sale of approximately $130 million

Why is Wesfarmers selling down its stake?

Wesfarmers managing director, Rob Scott, revealed that the coronavirus pandemic was a key reason for the sale.

He explained that the significant and unprecedented events of the past few weeks had highlighted the importance of balance sheet flexibility to support Wesfarmers in a range of economic circumstances.

Mr Scott commented: “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.”

“This divestment crystallises an attractive return for shareholders since demerger and further enhances Wesfarmers’ strong balance sheet position,” he added.

What now?

The two companies will continue their flybuys joint venture, allowing continued strategic collaboration in relation to their mutually beneficial growth initiatives.

Though, one thing that is ending is the Relationship Deed. With Wesfarmers’ interest falling below 10%, this agreement has now been terminated.

However, although this means Wesfarmers will no longer have the right to nominate a director to the Coles board, it intends to keep the Wesfarmers-appointed board member, David Cheesewright.

Coles chairman James Graham said; “Mr Cheesewright is a much valued member of the Coles Board and brings extensive global executive and board experience to Coles, including in international retailing.”

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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 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.