Kingfisher plans to demerge Woolworths

Kingfisher, the B&Q to Comet retail group, stunned the City yesterday with a plan to demerge its general merchandise business, Woolworths and Superdrug.

Kingfisher, the B&Q to Comet retail group, stunned the City yesterday with a plan to demerge its general merchandise business, Woolworths and Superdrug.

The announcement marks a dramatic shift in strategic direction for Kingfisher and came as Sir Geoff Mulcahy, group chief executive, unveiled a steep drop in first-half profits, burdened by heavy e-commerce costs and the impact of aggressive high street discounting.

Analysts said the move raised the chances that a predator could be tempted to bid for the new Kingfisher, which will comprise its slew of fast-growing DIY and electrical chains across Europe.

Kingfisher also announced a profits warning, together with an aggressive expansion plan for the general merchandise arm, with 700 new or reformatted stores and up to 20,000 new jobs planned over the next five years.

Sir Geoff said the company would press on with plans for 90 Big W stores, large units that pool the group's general merchandise offerings. It also plans 400 Woolworths General Stores, modelled on US drug stores. "Mass-market retailing is going through a period of intense change," Sir Geoff said. "By creating two separate businesses with their own focused strategies and dedicated management teams, Kingfisher believes they will both be better placed to accelerate development."

He said that there was a trend toward global retailing, with rapid consolidation, intense price competition and fast-changing customer demands.

The plan caught analysts unawares, none having expected the break-up of a group that unites some of the high street's most famous outlets.

Sir Geoff said he would remain at the helm of the new Kingfisher, and take on the position of acting chairman of the yet-to-be-named general merchandise arm until a head had been appointed. There was no detail yesterday of the rest of the management line-up, nor how e-Kingfisher, its online initiative, would be affected, nor the divisions of company debt.

The demerger is set to be completed in the second quarter of next year, with an extended period of execution so management can finalise arrangements and cope with the critical Christmas trading season.

"This has been looked at for the past year probably. It's difficult to put a timetable on it.... We had a strategic review after the Asda thing," Sir Geoff said. Last year, US retail giant Wal-Mart gatecrashed Kingfisher's £17bn deal to merge with the supermarket chain. Kingfisher shares have been under pressure since July, with investors fearful that yesterday's results would be poor, in part because of the heightened challenge posed by the US retail powerhouse.

One analyst said: "It [the demerger] is a complete reversal of what they've been saying. Their profits have collapsed and now they have been forced into this. The shares are only up today because someone may have a go at them."

In the first-half to 29 July, pre-tax, pre-exceptional profits slumped 20 per cent to £204m, on turnover up 11.8 per cent to £5.41bn, a record. "Profits in the short term will be impacted by the ongoing revenue investment costs. ... We expect to return to solid profit growth thereafter," the company said.

Yesterday's headline numbers masked vastly different performances. Group like-for-like sales rose 6.5 per cent, with B&Q ahead by 8.1 per cent, but Superdrug growing just 0.2 per cent. The company said accounting changes and the weakness of the euro against sterling also undermined its performance. Kingfisher shares jumped 24p to 477.5p, compared with a year-high of 685p in January.