There’s speculation that the conglomerate might be keen on repeating a winning strategy following the Coles Group Ltd (ASX: COL) spin-off a little more than a year ago.
This time, it’s Wesfarmers’ holdings in its Bunnings Warehouse properties that’s in the spotlight. It’s rumoured that bankers are trying to persuade management to divest its holdings in the $2.5 billion BWP Trust (ASX: BWP), according to the Australian Financial Review.
The Wesfarmers share price jumped 1.9% in early trade to $46.36 when the ASX 200 index gained 1.4%.
The sell-down of Wesfarmers’ 25% stake in BWP could net the group more than the $600 million plus that BWP’s market cap might imply. This is because Wesfarmers will also likely have to sell its management rights in the trust.
But this could be a sticking point as Bunnings can effectively management the properties even though it doesn’t own them.
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The 20-bagger return
On the other hand, the management rights risk can be managed and the temptation to cash in on the property trust might be too great to resist.
The BWP share price jumped over 2% this morning to $3.92 and is just a tat off its late January pre-coronavirus high of $4.12.
Wesfarmers’ done very well in this investment, which it held since BWP floated in 1998. Back then, the holding was worth a mere $33 million to the conglomerate, reported the AFR. At today’s market price, it’s a near 20-bagger.
What’s more, the group also netted $13.4 million in management fees from the trust in the last financial year.
Can Wesfarmers undertake a capital return
Given that divesting assets is in fashion with the amount of shareholder value added to groups that have undertaken such a manoeuvre, shareholders will be eagerly watching this space.
This is particularly so because the cash bonanza from the sale may flow back to shareholders via some capital return program.
Wesfarmers is already cashed up with more than $5 billion in the kitty. Unless it can find a sizable acquisition to undertake, it will be under pressure to return some love to shareholders.
Meanwhile, Wesfarmers isn’t the only oversized group that is under the divestment spotlight. The Woolworths Group Ltd (ASX: WOW) share price is also on watch as investors ponder the future of its Big W department store.
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Motley Fool contributor Brendon Lau owns shares of Woolworths Limited. The Motley Fool Australia owns shares of COLESGROUP DEF SET, Wesfarmers Limited, and Woolworths 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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