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Will the Woolworths demerger pay off for shareholders?

Sebastian Bowen
Woolworths share price

The Woolworths Group Ltd (ASX: WOW) share price has opened stronger this morning, starting the week off at $37.26 and rising up to $37.50 at the time of writing. WOW shares are now up an incredible 28.5% for the year so far (not including dividends), but will the good times keep rolling in for Woolworths shareholders?

The company’s management seems to think so (big surprise there).

According to a report in the Australian Financial Review (AFR), Woolworths is finalising documents that will be sent out to shareholders ahead of the company’s shareholder meeting on 16 December. In these documents, Woolworths is outlining the benefits of merging its Endeavour Drinks segment with the company’s  hotel and gaming business, ALH Hotels.

This is the first step in Woolworth’s plan to eventually spin-off its entire Drinks business as a separate ASX-listed company.

This new company would house the ALH Group as well as the Dan Murphy’s and BWS bottle shop chains that come under the Endeavour Drinks stable.

But according to the report, many investors are worried about the cost of such an operation, estimated to come out at around $275 million – the new company will have to have its own management team, board and maybe even new offices separate from Woolworths.

Woolworths’ drinks divisions are heavily integrated within the Woolworths supply network, with many BWS stores ‘bolted-on’ to existing Woolworths’ supermarkets, with shared docking/loading facilities.

How the newly separated companies will work together post-demerger will have to be formalised by a long series of partnerships and agreements that will encompass shared facilities, marketing and the Woolworths Rewards programs, amongst other considerations.

Woolworths’ management is bullish on the proposal, however, and is confident any incurred costs from the divorce will be outweighed by the benefits.

Woolworths chief operating officer David Marr told the AFR that he thinks “it will be a great outcome for both businesses ultimately.”

He added:

With food it gives tremendous simplicity to its model, focusing on food and everyday needs, and with Endeavour it provides a pure focus on drinks and hospitality and direct access to capital, which is important to help deliver its growth potential… Most shareholders understand the logic of the benefits of simplicity and they like this idea of two business focused on their core. They’ve generally been very supportive so far.

We will have to wait until December to find out if Woolworths’ shareholders agree.

The post Will the Woolworths demerger pay off for shareholders? appeared first on Motley Fool Australia.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019