The Coles Group Limited (ASX: COL) share price has fallen in response to the news that the supermarket business has made a deal regarding its hotels business.
After 10 years being owned by Wesfarmers, Coles Group was split from the broader Wesfarmers conglomerate (which owns Bunnings Warehouse) in November 2018. However, the Coles name has operated in Australia for 100 years. Today Coles is one of the largest retailers in the country, serving 21 million customers per week across its supermarkets, Coles Express, Online, Vintage Choice and others.
Why Coles Share Price Is Down
Coles announced that it has entered into a joint venture with ‘Australian Venue Co’ with Coles’ Hotels business, Spirit Hotels.
The agreement states that Australian Venue Co will manage the day to day operations with Spirit Hotels and will receive the economic benefit of the business.
Meanwhile, Coles will manage the day to day operations of the 243 retail liquor stores in Queensland and 10 retail liquor stores attached to Spirit Hotels venues in Western Australia and South Australia, and will receive the economic benefit of this particular business.
According to Coles, Australian Venue Co is a highly experienced and responsible operator of hospitality assets, it has more than 60 venues across the country. It is majority owned by funds advised by private equity business KKR, which will also allow the JV company to access funds.
Once the deal with complete, Coles will receive $200 million in cash, although it will book a loss of $20 million. It also means an annual hit of $300 million of earnings and $13 million of EBIT to Coles.
Coles CEO Steven Cain said: “The agreement with AVC will enable each party to bring relevant expertise to the joint venture…AVC has plans to grow the hotel portfolio in Queensland which will in turn provide Coles with the opportunity to further grow its Retail Liquor business in that state.”
Is Coles a buy?
It does make sense to unlock some value from the hotels so that Coles can concentrate on its core competency and afford to pay for the automated warehouses that it’s investing in.
Whilst Coles may be able to offer a defensive source of earnings and perhaps a good dividend, the supermarket space is just going to get more competitive with Amazon, Aldi, Costco (and perhaps others) decreasing prices. This makes it hard to grow margins. I’d rather invest in one of the proven ASX shares below rather than Coles at the current share price.
3 Proven ASX Shares I Prefer To Coles
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