• Analysts from Credit Suisse value Coles at between $17-18 billion.
• Citi analysts ascribed a value of $18.042 billion, and said the sale was a good move for Wesfarmers.
• Details about the Coles’ separation and capital structure have yet to be announced.

Wesfarmers’ decision to spin off Coles will no doubt give rise to a range of forecasts about how Coles will be valued as a separate listed entity.

“Further detail, including Coles’ proposed capital structure, dividend policy, separation, and governance arrangements will be announced in due course,” Wesfarmers said in its announcement this morning.

Responding to the announcement, analysts at Credit Suisse (CS) estimated Coles’ sale value at between $17-18 billion in a sale, assuming $1.5 billion of debt.

“On first impressions, the proposal seems unambiguously positive for Wesfarmers and a strong signal of management’s intent to move Wesfarmers to a higher growth group of businesses,” Credit Suisse said.

In addition, a report by CS earlier this week gives an indicative guide as to what Coles is currently worth within the company.

The Credit Suisse report valued Coles at $20.998 billion — comprising about 38% of the conglomerate’s total value of $54.84 billion, excluding net debt and other adjustments:

CS applied of a value of $19.404 billion to Coles’ food & liquor operations, comprised of Coles supermarkets and liquor outlets including First Choice Liquor and Vintage Cellars.

The company’s network of Coles Express convenience stores and financial services operations were valued at a further $1.584 billion.

In a separate response this morning Citi analysts gave Coles an enterprise value of $18.042 billion in the event of a sale.

Citi called the announcement a “positive development” for Coles.

“De-merging the capital intensive Coles business creates an opportunity for Wesfarmers to accelerate acquisitions — likely to be a domestic industrial business, in our view,” Citi said.

As part of its appraisal earlier this week, Credit Suisse said the market had been “too pessimistic” on Coles.

Sentiment towards Coles has soured in recent reporting periods, as sales growth has failed to keep up with its main competitor, Woolworths, after years of positive momentum.

“It appeared that there was inertia in adapting to Woolworths’ improvement and the pressure that was applied as a result of slowing sales growth, with some short term decisions on costs resulting from that pressure,” CS said.

“Third party surveys show that customer satisfaction associated with Coles fell across nearly all metrics in 2017, indicative of some short term decisions.”

But on a comparative basis, CS said structural differences between the two companies were minimal.

“Our price surveys show no material difference in price levels or promotional behavior between Coles and Woolworths.”

“Absolute scale favors Woolworths, suggesting that it should maintain a higher profit margin due to fixed cost leverage. Systems are similar. Supply chains are similar.”

Credit Suisse said the recent switch in sales momentum between Coles and Woolworths was more of an inevitable reversion, rather than signs of a sustained downtrend.

“We think the future is still in Wesfarmers and Coles’ hands and there is a realistic potential to stabilise performance without a more severe profit reset and under-performance.”

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