Where next as Wesfarmers cuts its stake in Coles

As Wesfarmers further reduces its position in Coles, we examine the consequences and the investor response.

As news began to circulate that Wesfarmers (WES) would be further reducing its stake in Coles Group (COL), the share prices of both companies traded in a volatile fashion at the start of the week.

Coles was the worst hit, with its stock finishing out Tuesday’s session almost 10% lower – at $15.16 per share. Wesfarmers fared a shade better, though its stock still declined by 4.51% yesterday – closing out the session at $34.27 per share.

Both stocks however rebounded strongly on Wednesday, with Coles rising 4.42% while Wesfarmers gained 4.11%.

Particulars of the deal

On Monday, Wesfarmers revealed that it would be selling a further 5.2% of its stake in Coles Group – reducing the conglomerate’s holdings in the supermarket to just 4.9%.

This comes after Wesfarmers had already reduced its stake in Coles by 4.9% in mid-February – through a block trade handled by Macquarie Capital and UBS.

Ultimately, this latest sale represents a move aimed at shoring up the conglomerate’s balance sheet amidst elevated levels of uncertainty, with Wesfarmers noting that the share sale ‘crystallises an attractive return for shareholders.'

Indeed, between its spin-off from WES and its 2020 peak, the Coles share price has performed strongly, rising as much as 40% in that period.

Commenting on the broad strokes of this latest sell-down, Wesfarmers Managing Director said:

'We have been pleased with the performance of Coles since the demerger and the very important role that Coles is providing, and will continue to provide, to Australian households during the COVID-19 crisis.’

WES indicated that it has no intention to further reduce its stake in Coles Group within the next 60 days.

Wesfarmers & Coles share prices: the consequences

Centrally, with the Wesfarmers stake in Coles now dropping below 10% – the relationship deed established at the time of the Wesfarmers-Coles demerger will be terminated. One consequence of this entails that ‘Wesfarmers will no longer have the right to nominate a director to the Coles Board,’

For example, it was noted that David Cheesewright 'will continue as a director of the Coles Board, although he will no longer be a Wesfarmers nominee.'

Strategic initiatives – such as the Coles-Wesfarmers flybuys join venture will also be maintained.

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