Date chosen for Coles’ ASX listing, after court orders shareholder vote

The Australian
OCTOBER 5, 2018
ELI GREENBLAT
Wesfarmers has released the scheme booklet for its $20 billion demerger of Coles which has revealed that the supermarket business’s liquor arm is pushing ahead well with its transformation to grow earnings – albeit with some hiccups – but that its Coles convenience stores are facing dwindling pre-tax profits.
Meanwhile new Coles boss Steven Cain will be paid total fixed remuneration of $2.1 million and will pocket a cash payment of $3.9m to make up for the bonuses he gave up when he quit wholesaler Metcash to run Coles.
The $3.9m payment will be split in three payments, $900,000 in November, $1.5m at the end of December and $1.5m at the end of December 2019.
It comes after the Supreme Court of Western Australia today ordered a meeting of Wesfarmers shareholders to vote on the $20 billion demerger, and after it was revealed that shares in a newly-listed Coles are set to start trading on the ASX on November 21.
The demerger documents released this afternoon show Coles liquor had sales of $3.3 billion in 2018 and pre-tax earnings of $130m while its convenience stores had sales of $5.8bn and pre-tax earnings of $133m.
But the once-struggling liquor arm of Coles, which includes its Vintage Cellars and Liquorland banners, has begun to turn around after underperforming for a while.
The Coles demerger scheme booklet shows that its liquor business on a pro-forma basis had pre-tax earnings of $100m in fiscal 2016, rising to $138m in 2017 and slipping to $130m in 2018.
However, Coles convenience stores have found the path a lot rougher going, with the division reporting earnings of $190m in 2016, and the same in 2017, falling to $133m in fiscal 2018.
Coles has also shown to be holding $1 billion of freehold property on its books.
The demerger scheme booklet also reports there will be one-off transaction costs of roughly $148 million linked to the demerger and Coles will incur one-off separation costs of $25m.
It is estimated that net additional corporate costs for Coles running as a stand-alone business will be $28m, as well as $28m in annual ongoing costs for Coles to pay various group insurance and workers’ compensation charges.
It comes at a time when earnings for Coles are on the slide, and according to the scheme booklet were, on a pro-forma basis, $1.523bn in fiscal 2016, falling to $1.186bn in 2017 and $1.176bn in 2018.
Coles chief financial officer Leah Weckert will be paid a total fixed remuneration of $900,000 but, like her boss Mr Cain, will have access to short term and long term bonuses.
Mr Cain’s short term bonus could be up to 120 per cent of his fixed pay, or around $2.5m, while Ms Weckert will also have short term bonuses of up to 120 per cent of her fixed pay.
After listing Coles plans to make a long term incentive grant of restricted shares under the long term incentive plan with a total face value of $4.53m to Mr Cain, Ms Weckert and select members of the senior management team.
Under that plan Mr Cain will be granted with shares with a face value of $1.05m and Ms Weckert with shares of face value of $450,000.
Earlier, a court hearing in Perth opened the way for the spin-off to go ahead subject to regulatory, court and shareholder approvals.
A meeting of Wesfarmers shareholders to vote on the $20 billion demerger has been set down for November 15, in Perth, while shares in the spun-off company are due to start trading on November 21.
It was also revealed that an independent expert concluded the proposal to create a new, top 30 Australian publicly-listed company was in the best interests of Wesfarmers’ shareholders.
Coles will have an expected dividend payout ratio of 80 per cent to 90 per cent of earnings.
Following the demerger Wesfarmers (WES) will keep a 15 per cent stake in Coles and 50 per cent of the flybuys rewards business.
Eligible Wesfarmers shareholders will receive one Coles share for every Wesfarmers share they hold.
An independent expert report from Grant Samuel & Associates concluded the demerger was in the best interests of Wesfarmers shareholders, Wesfarmers said today.
“Demerging Coles enhances Wesfarmers prospects of delivering satisfactory returns to shareholders by shifting our investment weighting and focus towards businesses with higher future earnings growth prospects,’’ said Wesfarmers chairman Michael Chaney.
Coles has secured committed bank facilities of around $4 billion to support net debt of approximately $2bn at demerger.
Mr Cain, the former supermarkets boss for wholesaler Metcash, ran the food and liquor arm of Coles 15 years ago when it was part of the old retail conglomerate Coles Myer.
Mr Cain took the reins from former Coles boss John Durkan.
Wesfarmers recently unveiled the new directors of Coles would be Abi Cleland, Wendy Stops and Zlatko Todorcevski.
Last month Wesfarmers said its long-serving director and chairmanship of investment advisory firm Gresham Partners, James Graham, would be the chair of Coles.
Other already announced directors of Coles are David Cheesewright, the former chief executive of Walmart International, Jacqueline Chow, a director of NIB and former Fonterra chief operating officer, and Richard Freudenstein, a REA Group director and former chairman.
Wesfarmers will retain a 15 per cent stake in Coles when it is demerged in November.