By Stuart Condie

SYDNEY--Woolworths Group Ltd. aims to demerge drinks and hospitality business Endeavour Group into a separately listed company before returning up to 2.0 billion Australian dollars (US$1.57 billion) to its shareholders.

The Australian supermarket chain on Monday said it had concluded a demerger was the most appropriate route for its near two-year-old plan to separate Endeavour.

Woolworths shareholders will receive shares in Endeavour on a one-for-one basis, with the supermarket chain and joint-venture partner Bruce Mathieson Group each holding a 14.6% stake at demerger, Woolworths said.

Woolworths said it will consider capital management options following the demerger and repayment of intercompany borrowings. The chain said it could return between A$1.6 billion and A$2.0 billion to shareholders, subject to trading conditions and board approval.

Woolworths said the move was supported by a strong balance sheet. It had a proforma net cash position of A$75 million at January 3, excluding lease liabilities.

It did not say how it would pass on the money to shareholders. In February, investment bank UBS suggested that an off-market share buyback was a possibility.

Endeavour Group would initially follow Woolworths' dividend policy of paying shareholders 70-75% of net profit, starting in the second half of the 2021 fiscal year. Total dividends from Woolworths and Endeavour are expected to be broadly equivalent to the final dividend had the demerger had not gone ahead, Woolworths said.

In February, the group declared an interim dividend of A$0.53 per share.

Woolworths will continue to operate its eponymous Australian supermarket chain, Countdown supermarkets in New Zealand, and Big W department stores. It said it will benefit from a simplified organizational structure, a greater focus on food and everyday needs, and the ability to pursue adjacent growth opportunities.

Write to Stuart Condie at stuart.condie@wsj.com

(END) Dow Jones Newswires

05-09-21 1917ET