Ratings agency S&P likes Wesfarmers news that it plans the spin off of 80% of its Coles supermarkets and liquor businesses to shareholders in the next year.
The ratings group said says its credit ratings on Wesfarmers (A-/Stable/A-2) will not be threatened by the spin-off Coles.
Coles accounted for about 60% of Wesfarmers’ capital employed and 34% of divisional earnings.
We don’t know the value of the spin off – the market will give an indicative value just before the deal is done (like Fairfax’s spin off of Domain late in 2017). Some brokers reckon the spin off will be valued around $19 to $21 billion.
Seeing Wesfarmers paid $19.3 billion for Coles Group back in 2007 (issuing 308 shares at $45.73 in the purchase, and then a second issue at $13.50 in 2009 raising $2.8 billion (after $2.5 billion was raised in 2008 at $29 a share) both in the depths of the GFC slump, plus the write downs at Target and HomeBase of more than $3 billion, the total cost of the Coles adventure is probably well north of $30 billion.
It is very hard seeing that price being reached in the spin off.
Wesfarmers sold its insurance business to IAG in 2003 for $1.85 billion (it was part of the company at the time of the Coles deal) and sold Curragh coal mine for around $600 million (it was also owned by the company in 2007 prior to the Coles deal.
So those gains can’t be added to the overall returns from the Coles transaction just over a decade ago.
So it is no wonder S&P (and shareholders and others) are happy to see the spin-off.
“We believe Wesfarmers remains committed to retaining its current ‘A-‘ long-term credit rating, including adhering to more conservative credit metrics to offset the loss of high-quality supermarket earnings and reduced business diversity," S&P said late Friday.
"Our strong assessment of Wesfarmers’ management and governance reflects our view that the group has an established track record of risk management, strategic positioning, and organisational effectiveness across its diverse business lines."
The market and analysts seem happy with the news because it will get the Wesfarmers balance sheet in good shape and dependant on the performance of its star businesses, Bunnings, Kmart and Officeworks.
The weakly performing Target department store chain will be retained, but it wouldn’t surprise to see that sold, or even shut given the $2.1 billion or more in losses and impairments in the value of the chain since 2014.
New CEO Rob Scott wrote a further $306 million off the value of Target earlier this year, the still poorly performing Australian department store chain. That takes total write offs for target to more than $2.1 billion since 2014 when $677 million was written down.
A further $1.208 billion was written off Target in 2015 -16, along with $850 million off the value of the Curragh coking coal mine in central Queensland (that was sold for $600 million last December).
All up Wesfarmers has written off more than $4.7 billion since 2015 on Target, coal, and the UK (plus trading losses in Target and at Curragh totalling over half a billion dollars and $145 million spent repositioning Target in 2014-15 and 16).
At the same time as the second Target write down, Scott also wrote down the value of its Homebase adventure in the UK by $1 billion and it wouldn’t surprise if it was shut if losses continue.
