Supermarket Coles is likely to find itself in second place to arch-rival Woolworths when parent company Wesfarmers spins it off as a separate ASX-listed company, a new analysis suggests.
Analysts from investment bank UBS say Coles will face higher capital expenditure and costs as a stand-alone business and this will weigh on the supermarket chain's earnings.
Shares in Wesfarmers rallied on Friday after the Perth conglomerate announced its plan to spin off Coles.
Wesfarmers wants to retain as much as 20 per cent of the new, publicly listed Coles business, which analysts suggest would be worth about $18 billion, while keeping Bunnings, Kmart, Target, Officeworks and its industrial businesses.
UBS says a separately listed Coles should trade at a roughly 10 per cent discount to Woolworths because it will have lower earnings growth, higher capital expenditure and is less diversified than Woolworths.
Woolworths has a lucrative hotels and poker machine business, while the demerged Coles is mainly in the grocery business but will also include liquor stores and 88 hotels.
"Coles will generate about 90 per cent of earnings before interest and tax from Australian grocery (residual from hotels and liquor) versus Woolworths at 80 per cent," a note by UBS analysts said on Monday.
Deutsche Bank analyst Michael Simotas says the demerger is likely to be positive for Woolworths in the short term.
"The disruption from the management change and demerger process could enable Woolowrths to extend its sales growth leadership," Mr Simotas said in a report.
He said he expects Coles to trade at a 15 per cent discount to Woolworths.
Wesfarmers wants to offload Coles to focus on higher growth businesses.
Coles accounts for 60 per cent of Wesfarmers' employed capital but only 34 per cent of group earnings, while its sales growth has been lagging Woolworths for more than a year.
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