Why is the Woolworths (ASX:WOW) share price down 15% today?

Woolworths is splitting into two on Thursday…

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The Woolworths Group Ltd (ASX: WOW) share price is sinking on Thursday morning.

At the time of writing, the retail conglomerate’s shares are down a sizeable 15% to $35.95.

Why is the Woolworths share price sinking?

The good news for shareholders is that the declining Woolworths share price has nothing to do with a trading update or broker note but everything to do with the spin-off of its drinks business.

This morning the company’s drinks business landed on the ASX boards as Endeavour Group Limited (ASX: EDV). This spin-off sees Woolworths shareholders receive one Endeavour Group share for every Woolworths share they own.

In light of this, the Woolworths share price has declined to reflect the loss of the drinks business from its valuation.

Spin-off thoughts

Goldman Sachs has been looking at the spin-off and sees a lot of positives from it. This is particularly the case with the company’s plan to make a capital return of up to $2 billion post-merger.

It said: “The demerger of Endeavour Group simplifies WOW towards a more tightly focused supermarket offering across Australia and New Zealand and eliminates the ESG issues associated with the gaming and alcohol aspects of Endeavour Group. A demerger would also leave the company in a strong balance sheet position with excess capital even after a proposed A$1.6-2.0bn capital return (post demerger). We expect FCF post Dividend obligations to return to >A$1bn in FY23e, in line with FY20, despite the demerger. We also forecast Woolworths Group ex. Endeavour to turn to a net cash position by FY23e.”

Though, the broker notes that the demerger is not without risks.

Goldman explained: “While this increased focus is a benefit for the group, the demerger also exposes investors to a more concentrated supermarket operation and leaves Big W looking more of a strategic outlier. As a more concentrated supermarket operation, WOW post demerger will expose shareholders to a range of risks including: (a) potential increase in online competition and capacity in the next three years, (b) capacity utilisation in physical stores at risk of declining and (c) the supply chain upgrades in the sector could impact WOW’s relative competitiveness, potentially compelling WOW to upgrade as a countermeasure.”

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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