FAQs


Overview

Demerger Proposal

1. What is the Demerger?

The Demerger is the proposed separation of Wesfarmers’ Coles division to create an independent ASX-listed retail company with leading market positions in Australian supermarkets, liquor and convenience.

Wesfarmers Shareholders will retain their Wesfarmers Shares and Eligible Shareholders will be entitled to receive one Coles Share for every Wesfarmers Share held at the Record Date.
The Demerger does not require any Wesfarmers Shareholder to pay cash for Coles Shares. 

Scheme Booklet Section for more information - 1.1

2. Why has the Demerger been proposed by the Wesfarmers Board?

The decision to demerge Coles follows a review of Wesfarmers’ portfolio and the composition of its capital employed. 

Wesfarmers has delivered a successful transformation of Coles and restored its position as a leading Australian retailer. Coles has developed strong investment fundamentals as a mature and highly cash generative business. Coles is well positioned to continue to grow, with an earnings profile that is expected to be resilient through economic cycles. The Wesfarmers Board believes that Coles is of a scale where it should be owned and operated separately, having established a strong corporate infrastructure under Wesfarmers’ model of divisional autonomy.

A demerger of Coles will reposition Wesfarmers’ portfolio to target a higher capital weighting to businesses with strong future earnings growth prospects and allows for greater flexibility and impact in pursuing growth opportunities which enhance returns to shareholders.

Scheme Booklet Section for more information - 1.1

3. What alternatives did the Wesfarmers Board consider? 

The Wesfarmers Directors are of the view that the Demerger is more likely to enhance shareholder value in the long term than other available alternatives, including maintaining the status quo, undertaking an initial public offering of Coles, or a sale of Coles.

Having regard to the available alternatives that were considered, the advantages, disadvantages and risks as set out in Sections 1.3, 1.4 and 1.5 and the opportunity for both Wesfarmers and its shareholders to participate in the future growth of Coles, the Wesfarmers Board concluded that the Demerger is in the best interests of Wesfarmers Shareholders.

Scheme Booklet Section for more information - 1.2

4. What is Coles?

Coles is a leading Australian retailer, providing customers with everyday products including fresh food, groceries, household goods, liquor, fuel and financial services. As at 30 June 2018, Coles processed more than 21 million customer transactions on average each week via its store network and online platform, had over 112,000 team members across all of its businesses and operated 2,507 retail outlets nationally. 

Coles’ key strengths include:
operating in resilient and growing markets;
demonstrated ability to maintain a leading market position over time;
an established, non-replicable national store network;
a customer-focused ‘Fresh Tomorrow’ strategy to deliver shareholder returns;
cash generative businesses which are expected to underpin strong dividend distributions;
a robust balance sheet providing financial flexibility; and
a highly experienced board and management team.
The performance of Coles is subject to a number of risks, many of which Wesfarmers Shareholders are currently exposed to, while others may arise as a result of Coles becoming a standalone ASX-listed entity. These risks include:
operational risks including risks relating to the performance of IT systems, loss of data security, industrial disputes and risks inherent in the distribution and sale of goods;
strategic risks including increased competition (including from discount retailers), ineffective execution of strategy and changes in consumer behaviours; and
regulatory risks, including in relation to the sourcing of products, the sale of products and employees (including occupational health and safety).

These risks are described in further detail in Section 2.18. Coles has a number of strategies in place to mitigate these risks.

Scheme Booklet Section for more information - 2

5. Why is Wesfarmers retaining a shareholding in Coles?

Wesfarmers plans to retain a minority ownership interest of 15 per cent in Coles following the Demerger to support strategic alignment and reinforce collaboration opportunities between Wesfarmers and Coles in relation to mutually beneficial growth initiatives, including in the areas of data, digital and loyalty.

Scheme Booklet Section for more information - 1.1 and 3.1

6. What are Wesfarmers' intentions regarding its retained shareholding in Coles?

The ownership stake is important in reinforcing collaboration opportunities between Wesfarmers and Coles. Wesfarmers will retain its shareholding in Coles to the extent it is in the interests of Wesfarmers Shareholders to do so. There are no escrow or similar restrictions on the disposal by Wesfarmers of its 15 per cent shareholding. 

Scheme Booklet Section for more information - 1.1 and 3.1

7. What will the ownership structure of flybuys be post Demerger? 

Wesfarmers and Coles each currently own and will each continue to own 50 per cent of flybuys to support continued development of the loyalty program and better leverage the combined Coles and Wesfarmers digital and data assets to improve the companies’ respective customer offers.

Scheme Booklet Section for more information - 2.5.4.1 and 3.1

8.What will be Coles' strategy after the Demerger?

Coles’ strategic priorities are set out in Section 2.6. The Coles Board has confirmed that it intends to continue to focus on these strategic priorities following the Demerger.
The future strategy of Coles will ultimately be a matter for the Coles Board and Coles senior management to develop over time, and is subject to change or alteration as circumstances require.

Scheme Booklet Section for more information - 2.6

Recommendations

9. What is the recommendation of the Wesfarmers Directors? 

Each Wesfarmers Director recommends that you vote in favour of the Demerger Resolutions to be considered at the General Meeting and Scheme Meeting.
Each Wesfarmers Director intends to vote any Wesfarmers Shares held or controlled by him or her in favour of the Demerger Resolutions.

Scheme Booklet Section for more information - 1.1 and 8.3

10. What is the Independent Expert's opinion of the Demerger?

The Independent Expert has concluded that  the Demerger is in the best interests of Wesfarmers Shareholders.
A copy of the concise Independent Expert’s Report is contained in Section 7.

Scheme Booklet Section for more information - 7 

Advantages, disadvantages and risks of the Demerger

11. What are the advantages of the Demerger?

The key advantages of the Demerger include:
Wesfarmers Shareholders will have the flexibility to choose the level of their holding in Wesfarmers Shares and/or Coles Shares, which have different investment characteristics; 
Wesfarmers can pursue growth opportunities which have a greater impact on returns to shareholders; and
enhanced investor focus on Wesfarmers’ remaining businesses and Coles as a standalone business.

These advantages, together with other advantages of the Demerger, are discussed in Section 1.3.

12. What are the main disadvantages of the Demerger?

The key disadvantages of the Demerger include:
there will be approximately $148 million (pre-tax) in one-off transaction costs associated with the Demerger;
Coles will incur one-off separation costs of approximately $25 million;
net additional corporate and operating costs for Coles. It is estimated that its net additional annual, pro forma, corporate and operating costs of approximately $28 million will be incurred as a result of Coles operating as a standalone business following the Demerger, excluding operating costs transferred from Wesfarmers;
some Wesfarmers Shareholders will not be eligible to receive Coles Shares (and will instead receive cash proceeds from the sale of those Coles Shares under the Sale Facility) or may be unable to retain Coles Shares; and
the Demerger will create two separate companies listed on the ASX, each of which will be smaller and less diversified than Wesfarmers immediately before the Demerger, although both will remain significant entities with diversified operations.

These disadvantages, together with other disadvantages of the Demerger, are discussed in Section 1.4.

13. What are the potential risks associated with the Demerger?

The main risks of the Demerger include:
uncertainty regarding the combined market value of Wesfarmers Shares and Coles Shares following the Demerger;
the potential for delays, unexpected costs, or other issues in establishing Coles as a standalone entity; and
potential inability to obtain third party consents under contracts that may result in the termination of (or breaches under) those contracts.

These risks are discussed in Section 1.5. You should review this section carefully before deciding whether or not to vote in favour of the Demerger Resolutions.

14. What are the risks with respect to an investment in Coles?

Coles will be subject to risks which may adversely affect its future operating or financial performance, or the investment return or value of Coles Shares. Many of these risks are existing business risks, to which Wesfarmers Shareholders are already exposed, while others arise out of, or increase as a result of, the Demerger.

These risks are discussed further in Section 2.18. You should review this section carefully before deciding whether or not to vote in favour of the Demerger.

Coles after Demerger 

15. When will Coles Shares trade separately?

It is expected that Coles Shares will commence trading on the ASX on 21 November 2018, initially on a deferred settlement basis. 
It is the responsibility of Eligible Shareholders to determine their entitlement to Coles Shares before trading in Coles Shares, especially during the deferred settlement period. 
Trading on the ASX of Coles Shares on a normal settlement basis is expected to commence on 29 November 2018.

Scheme Booklet Section for more information - 4.7

16. What will Coles’ share price be?

There is no certainty as to the price of Coles Shares after the Demerger.

Scheme Booklet Section for more information - 1.5.1

17. In which stock market index will Coles be eligible for inclusion?

Upon implementation of the Demerger, it is anticipated that, based on free float market capitalisation, Coles will enter the S&P/ASX 50 index. However, no assurance can be provided that Coles will enter the index or will remain in the index in the future.

Scheme Booklet Section for more information - 1.4.4

18. What additional ongoing costs will Coles have as a standalone listed company?

Coles is expected to incur incremental, net ongoing costs of approximately $28 million per annum as a standalone listed entity. These incremental, ongoing costs include, amongst other things, share registry costs, company secretariat costs, the cost of maintaining a separate board of directors, and the cost of services currently provided by Wesfarmers to Coles, such as statutory accounting, treasury, legal and taxation.

In addition, annual costs of approximately $28 million per annum, largely related to group insurances and workers’ compensation self-insurance, which were previously incurred by Wesfarmers (but not on-charged to Coles) are expected to be incurred by Coles following the Demerger. Wesfarmers’ costs will reduce by this corresponding amount. 

Scheme Booklet Section for more information - 1.4.2

Coles after Demerger

19. What will Coles' dividend policy be? 

Coles’ dividend policy will be determined by the Coles Board at its discretion and may change over time.

The Coles Board intends to follow a dividend policy which has regard to current earnings and cash flows, available franking credits, future cash flow requirements and targeted credit metrics. As a result, Coles expects to distribute 80 to 90 per cent of underlying profit to its shareholders while retaining strategic flexibility.

Wesfarmers intends to pay an interim dividend in March 2019 with reference to the five months of Coles earnings prior to the Demerger. 

Coles expects to pay its first dividend in September 2019, which will be a final dividend for the year ending 30 June 2019, with reference to the seven months of earnings post Demerger.

It is anticipated that, taken together, the dividends to be declared by Coles and Wesfarmers for the year ending 30 June 2019 will be broadly equivalent to the dividends that Wesfarmers would otherwise have declared if the Demerger did not proceed (including in respect of franking).

Coles will distribute dividends with the maximum practicable franking credits for the purposes of the Australian dividend imputation system.

No assurance can be given in relation to the level of future dividends or the franking of such dividends (if any), as these will depend on future events and circumstances. The extent to which a dividend can be franked will depend on Coles’ franking account balance (which immediately following the Demerger will be nil). Coles’ franking account balance will depend on the amount of Australian income tax paid by Coles following the Demerger. Franking credits are generated through the payment of income tax, and Coles is expected to pay monthly income tax instalments.

Scheme Booklet Section for more information - 2.13.16

20. What will Coles’ capital structure be?

On implementation of the Demerger, Coles is expected to have net debt of approximately $2.0 billion. Coles’ balance sheet is expected to support strong investment grade credit ratings.

Coles will have committed bank facilities of $4.0 billion. See Section 2.13.10 for further details.

Coles will only have ordinary shares on issue and no other equity securities at the time of Demerger.

21. Who will be on the senior leadership team of Coles?

Following the Demerger, the Coles senior leadership team will comprise:
Steven Cain – Managing Director and Chief Executive Officer
Leah Weckert – Chief Financial Officer
Greg Davis – Chief Operating Officer
Paul Bradshaw – Store Operations Director
David Brewster – Legal and Safety Director
Alister Jordan – Coles Express, Coles Online and Corporate Affairs Director
Thinus Keeve – Store Commercial and Property Director
Daniella Pereira – Company Secretary
Cathi Scarce – Acting Liquor Director
Roger Sniezek – Digital and Financial Services Director
Matthew Swindells – Supply Chain Director

Scheme Booklet Section for more information - 2.10.2

22. Who will be on the Coles Board?

Following the Demerger, the Coles Board will comprise of eight directors: 
James Graham AM – Chairman
Steven Cain – Managing Director and Chief Executive Officer
David Cheesewright – Wesfarmers nominee
Jacqueline Chow – Non-Executive Director
Abi Cleland – Non-Executive Director
Richard Freudenstein – Non-Executive Director
Wendy Stops – Non-Executive Director
Zlatko Todorcevski – Non-Executive Director 

Scheme Booklet Section for more information - 2.10.1

23. What commercial arrangements will Wesfarmers and Coles have with each other following the Demerger?

Wesfarmers and Coles will enter into a Transitional Services Agreement to formalise the terms upon which Coles will provide a number of information technology, payroll, finance and other services to Kmart, Target and Officeworks, and for Wesfarmers to provide Coles with workers compensation claims management, insurance and lease management services. Coles and Wesfarmers will provide the relevant services for a transitional period following the Demerger, pending migration of those services, or the replication of the relevant services by, Coles, Kmart, Target and Officeworks. See Section 4.9.5 for further detail.

In addition to the flybuys joint venture, Coles will also enter into ongoing contractual agreements with Kmart, Target and Officeworks for the provision of payment acquiring services and for the provision of gift card services. For shared sites, Coles will enter into subleases and agreements for shared services and utilities with Kmart and Target. See Section 4.9.6 for further detail.

Scheme Booklet Section for more information - 4.9.5 and 4.9.6

24. When will Coles release its first results as a standalone company?

Half year results ending 31 December 2018 will be reported in February 2019, with first full year results as at 30 June 2019 to be reported in August 2019.

Wesfarmers after Demerger

25. Will Wesfarmers own any Coles Shares after the Demerger?

Yes. Wesfarmers will continue to own a shareholding of 15 per cent in Coles after the Demerger.

Scheme Booklet Section for more information - 1.1, 3.1 and 4.9.7

26. What will be the Wesfarmers share price after the Demerger?

There is no certainty as to the price of Wesfarmers Shares after the Demerger.

Scheme Booklet Section for more information - 1.5.1

27. In which stock market index will Wesfarmers be eligible for inclusion?  

In which stock market index will Upon implementation of the Demerger, it is anticipated that Wesfarmers will remain in the S&P/ASX 50 index. However, no assurance can be made that Wesfarmers will remain in the index upon Demerger or continue to be the index in the future.be eligible for inclusion? 

Scheme Booklet Section for more information - 1.4.4

28. What will be Wesfarmers’ strategy after the Demerger?

Wesfarmers’ primary objective remains to provide a satisfactory return to Wesfarmers Shareholders over the long term.

This will be achieved through four overarching strategies:
strengthening existing businesses through operational excellence and satisfying customer needs;
securing growth opportunities through entrepreneurial initiatives;
renewing the portfolio through value-adding transactions; and
ensuring sustainability through responsible long-term management.

Scheme Booklet Section for more information - 3.4 and 3.5

29. What businesses will Wesfarmers own following the Demerger?

Following the Demerger, Wesfarmers will have a portfolio of cash generative businesses with strong market positions in growing markets. 

Wesfarmers will comprise the Bunnings, Department Stores and Officeworks retail divisions and the Industrials division with businesses in chemicals, energy and fertilisers, and industrial and safety products. In addition, Wesfarmers will hold a number of non-controlling ownership interests, including in Coles, flybuys, BWP Trust, and Gresham Partners.

Scheme Booklet Section for more information - 3.3

30. Who will be on the Wesfarmers Board after the Demerger?

Following the Demerger, the Wesfarmers’ Board will comprise of eight directors: 
Michael Chaney AO – Chairman
Rob Scott – Managing Director
The Right Honourable Bill English KNZM – Non-Executive Director
Tony Howarth AO – Non-Executive Director
Wayne Osborn – Non-Executive Director
Diane Smith-Gander – Non-Executive Director
Vanessa Wallace – Non-Executive Director
Jennifer Westacott AO – Non-Executive Director

Scheme Booklet Section for more information - 3.7

31. Who will be on the senior leadership team of Wesfarmers?

Following the Demerger, Wesfarmers’ senior leadership team will comprise:

Rob Scott – Managing Director, Wesfarmers

Anthony Gianotti – Chief Financial Officer, Wesfarmers

Maya vanden Driesen – Group General Counsel, Wesfarmers

Michael Schneider – Managing Director, Bunnings

Ian Bailey – Managing Director, Kmart1

David Baxby – Managing Director, Wesfarmers Industrials

Linda Kenyon – Company Secretary, Wesfarmers

Jenny Bryant – Chief Human Resources Officer, Wesfarmers

Naomi Flutter – Executive General Manager, Corporate Affairs, Wesfarmers

Ed Bostock – Managing Director, Business Development, Wesfarmers

Alan Carpenter – Senior Advisor2

John Durkan – Senior Advisor2

Guy Russo – Senior Advisor3

Notes:

Effective from 1 November 2018, Ian Bailey will assume the additional responsibility for Department Stores.

Alan Carpenter and John Durkan will retire from their Senior Advisor roles in FY2019 or FY2020.

Guy Russo will remain as the Chief Executive Officer, Department Stores until 1 November 2018, following which he will transition to a Senior Advisor role.

32. What will be the impact of the Demerger on Wesfarmers’ dividends?

Wesfarmers’ dividend policy will not change as a result of the Demerger. In considering dividends, the Wesfarmers Board has regard to available franking credits, current earnings and cash flows, future cash flow requirements and targeted credit metrics.

It is anticipated that, taken together, the dividends to be declared by Coles and Wesfarmers for the year ending 30 June 2019 will be broadly equivalent to the dividends that Wesfarmers would otherwise have declared if the Demerger did not proceed (including in respect of franking).

Scheme Booklet Section for more information - 3.6

Implementation and process

33. What are the mechanics of the Demerger?

To implement the Demerger, Wesfarmers will undertake a Capital Reduction and Dividend, the proceeds of which will be automatically applied to the acquisition of Coles Shares by or on behalf of Wesfarmers Shareholders. Eligible Shareholders will receive one Coles Share for every Wesfarmers Share held at the Record Date.

Following the Demerger, Wesfarmers Shareholders at the Record Date will hold 85 per cent of the Coles Shares on issue, with the remaining 15 per cent of the Coles Shares to be held by Wesfarmers.

Scheme Booklet Section for more information - 4

34. What is the Capital Reduction?

Wesfarmers has proposed the Capital Reduction to permit Wesfarmers to reduce its share capital on the Implementation Date. The Capital Reduction Amount will not be paid in cash to Wesfarmers Shareholders. The Capital Reduction Amount will be applied (together with the Dividend Amount) on behalf of Wesfarmers Shareholders as consideration for the transfer of Coles Shares under the Scheme.

The Capital Reduction is conditional on the Scheme becoming Effective. This means that Wesfarmers will not undertake the Capital Reduction unless the Scheme becomes Effective. The Capital Reduction must be approved by a simple majority (more than 50 per cent) of votes cast by Wesfarmers Shareholders on the Capital Reduction Resolution.

Wesfarmers is of the view that, taking into account all relevant matters, the Capital Reduction is fair and reasonable to Wesfarmers Shareholders as a whole and will not materially prejudice the ability of Wesfarmers to pay its creditors.

The Independent Expert has concluded that the Capital Reduction will  not materially prejudice existing Wesfarmers creditors. Refer to Section 7 for a concise version of the Independent Expert’s Report.

Scheme Booklet Section for more information - 4.4

35. What are the key steps to implement the Demerger?

At the First Court Hearing on 5 October 2018, Wesfarmers obtained an order from the Court to convene the Scheme Meeting.

The key remaining steps to implement the Demerger are:

  • approval of the Capital Reduction by Wesfarmers Shareholders at the General Meeting;
  • approval of the Scheme by Wesfarmers Shareholders at the Scheme Meeting;
  • Court approval of the Scheme at the Second Court Hearing;
  • lodgement of the Court order with ASIC which will cause the Scheme to become Effective;
  • completion of the Corporate Restructure;
  • approval of admission of Coles to the Official List of the ASX and the official quotation of Coles Shares by the ASX; and
  • Eligible Shareholders (other than Selling Shareholders) receiving Coles Shares by way of the implementation of the Scheme.

If the Court approves the Scheme, Coles Shares are expected to trade separately on the ASX from 21 November 2018, initially on a deferred settlement basis.

Trading on the ASX of Coles Shares on normal settlement basis is expected to commence on 29 November 2018.

Sections 4.1, 4.2 and 4.3 contain further details of the Demerger, including a description of the approval thresholds and other conditions that must be satisfied or waived for the Demerger to proceed.