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Updated March 17, At first blush Wesfarmers' decision to spin-off its Coles business to pursue better growth opportunities is not a brilliant endorsement of the future of supermarkets in Australia. The Coles acquisition back in was seen at the time as a massive transformation for the Perth-based business, which had all sorts of bits and pieces besides its big-box hardware phenomenon Bunnings.
Wesfarmers' private equity partners couldn't get their figures to add up and bailed out on the deal, leaving then-chief executive Richard Goyder and his board to roll the dice and fund the deal themselves. But Coles has been turned around, Kmart has continued to prosper, Officeworks is solid and Target? Well, Target continues to bleed shareholder funds to this day. Wesfarmers' new boss Rob Scott believes it has been worth it and he will deliver a mature and cash generative business, which is expected to have a strong balance sheet and dividend paying capacity onto the ASX.
Add in the cash Wesfarmers had to pour into the businesses and the deal appears to be something of a break-even proposition. The capital gain hasn't been great as the share price is now only marginally above where it was when the big deal was done. While Wesfarmers says it will maintain an up to 20 per cent stake in Coles for strategic reasons, it clearly doesn't think there is an overly bright future in supermarkets and things are not going to get better any time soon.
Woolworths has regained its mojo and has sprinted by Coles in terms of like-for like sales growth. While suggesting the market may have undervalued Coles, Credit Suisse's retail team suggest all the "low-hanging fruit" has been picked in terms of productivity gains and cost cutting. Woolworths has already spent a lot on improving the efficiency of its supermarkets' "last 50 metres" supply-chain, although they have have yet to gain much traction. Wesfarmers hasn't done the same thing at Coles, according to Credit Suisse, and has been caught off-guard by developments.
At the same time, Woolworths is free from the debilitating distractions of the Masters hardware debacle just as Wesfarmers has its own home renovation financial black-hole opening up in the Bunnings UK and Ireland BUKI business. Wesfarmers is marketing the demerger as a "win-win" — a great opportunity for its investor base to be part of a vibrant new, yet somehow mature, top company, while Wesfarmers itself can look at "growing" the remaining businesses and buy some new ones with the soon-to-be flush balance sheet.
Escala Partners chief investment officer and one-time retail analyst Giselle Roux isn't buying the deal. Why pay 18 times for a supermarket business growing at GDP plus a bit of population growth, say 5 per cent? If they put in Bunnings, or bundled up all the retail maybe, although it have been left with a load of rubbish.
Well assuming it is approved by shareholders, Wesfarmers can get back to its early days of being a trader; buying and selling assets. Wesfarmers chairman Michael Chaney certainly hopes so, saying the demerger would extend the group's "long history of actively managing its portfolio". Recent investment decisions, such as expanding the Bunnings model to the UK, haven't been too successful with BUKI now being written down by far more than Wesfarmers has invested in it.
So all cashed up, but what to do now? Perhaps invest in a book by one of the world's most successful, and certainly most pithy investor, Warren Buffett. Never forget rule No. First posted March 16, If you have inside knowledge of a topic in the news, contact the ABC. ABC teams share the story behind the story and insights into the making of digital, TV and radio content.
Read about our editorial guiding principles and the enforceable standard our journalists follow. While no-one expects someone to front Malcolm Turnbull over his 30th Newspoll loss today, the signs of leadership tension are already apparent, writes Louise Yaxley. On March 1, Bob, Mick and Tom French made history and were even featured in an advertising campaign.
Commonwealth Games mascot Borobi is capturing attention and hearts the world over and one man has been riding the wave of Games love with him. Breaking news An airfield in the Syrian city of Homs has been targeted with missiles, state television is reporting. By business reporter Stephen Letts. Wesfarmers year tussle with Woolworths for supermarket and liquor sales domination looks a set to end with the Coles business to be spun-out later this year.
Coles is being spun off for what could be a billion less than it was bought for. Can Wesfarmers dig Bunnings out of its UK hole, or is better just to bury it? Woolworths widens the gap on Coles as 'down, down' looks down and out. Wesfarmers share price has been flat-lining for several years after rebounding out of the GFC Source: Coles started losing growth momentum in , while Woolworths accelerated around the same time.
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Where are Canberra's first triplets now? Borobi's 'hype man' By Damien Larkins Commonwealth Games mascot Borobi is capturing attention and hearts the world over and one man has been riding the wave of Games love with him.
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