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UPDATE 2-Australia's Woolworths to gain $870 mln cash in property spin-off

* Property assets valued at A$1.4 bln

* Property group to raise up to A$506 mln

* Woolworths to get at least A$850 mln in cash from deal

(Recasts on expected cash proceeds)

By Victoria Thieberger and Narayanan Somasundaram

MELBOURNE/SYDNEY, Oct 5 (Reuters) - Australia's top supermarket operator Woolworths Ltd will spin off 69 shopping centres into a separate listed unit, a move that will gain it at least A$850 million ($870 million) in cash and improve its balance sheet as it focuses on its core retail business.

The plan to offload the properties, worth A$1.4 billion, comes as Australian retailers face rising competition from nimble online rivals which has forced them to look at options to simplify their business and save costs.

"We are focused on growing earnings from our core retail business. Reducing the capital invested in property will allow Woolworths to focus on other growth options," Chief Executive Grant O'Brien said in a statement.

The deal could also spell the end of Woolworths' efforts to add property - a strategy that it embarked on during the global financial crisis backed by a strong balance sheet. Historically, it has preferred to enter into long term leases rather than hold property assets.

According to its 2012 annual report, Woolworths property and development portfolio was worth over A$4 billion.

Woolworths said it would create the SCA Property Group, a real estate investment trust, via a distribution to Woolworths shareholders and a related offer to investors, adding that the REIT would raise up to A$506 million in fresh equity. Woolworths will receive cash from the equity issue and from the debt facility of the REIT.

The supermarket operator added that the move would also reduce property, plant and equipment on its balance sheet by $A1.27 billion, and analysts said they expect the company to use proceeds from the spin-off to retire debt.

"We believe the proceeds would initially be used to retire debt with capital management likely in financial year 2014," UBS analyst Ben Gilbert said.

In addition to its Woolworths supermarket chain which competes with Wesfarmers Ltd's Coles, the company operates brands including discount retailer Big W, liquor chain Dan Murphy's and Masters Home Improvement.

The retailer will not get any shares in the REIT and have no stake. All but one of the properties to be spun off have been developed or redeveloped by Woolworths and a group business is the anchor tenant for each property.

The REIT's offering will come in the form of 337.3 million stapled units, and it is expected to raise between $425 million and $506 million. Stapled securities often consist of one trust unit and one share in the funds management company that cannot be traded separately.

Woolworths shareholders will get one stapled unit in SCA Property Group for every five Woolworths shares that they hold on Nov. 30.

At 0345 GMT, Woolworths shares were up 1.9 percent at A$29.8 while the broader market was up 0.8 percent. ($1 = 0.9771 Australian dollars)

(Editing by Edwina Gibbs)

((victoria.thieberger@thomsonreuters.com)(+61 3 9286 1421)(Reuters Messaging: victoria.thieberger.reuters.com@reuters.net))

Keywords: AUSTRALIA WOOLWORTHS/