(Adds context, Wesfarmers share move) Australian conglomerate...

(Adds context, Wesfarmers share move)

Australian conglomerate Wesfarmers Ltd's (WES) spin-off Coles Group (COL) began trading on Wednesday at A$12.49, giving it a market value of A$17.27 billion ($12.46 billion) that was above expectations.

The debut on the Australian bourse underlined confidence in the nation's No.2 supermarket chain even as it faces fierce competition in the supermarket sector, where a price war with arch rival Woolworths Group Ltd (WOW) is driving deflation and where online rivals are steadily gaining ground.

The 104-year-old firm was acquired by Wesfarmers more than a decade ago. However, low margins despite the billions of dollars of investments and ruthless competition in the sector prompted Wesfarmers to shed the capital-intensive business.

"They (Wesfarmers) are selling Coles because there are structural problems in the industry going forward...in the shorter term, it'll be okay, but the long term dynamics is going to be challenging," Mathan Somasundaram, a market portfolio strategist at Blue Ocean Equities, said.

Without Coles, which was estimated by analysts to be worth about A$16 billion, a slimmed-down Wesfarmers would earn nearly 60 percent less revenue but could generate about 50 percent more return on capital, according to research released by the company last month.

Wesfarmer shares were down as much as 30.6 percent, reflecting the divestiture, while the broader market (xjo) inched 1.08 percent lower.

Somasundaram said investors were buying Coles in a weaker market as it is a defensive player at this point.

The demerger of the supermarket chain is part of Wesfarmers' biggest portfolio revamp in years, with the conglomerate set to make domestic hardware and department stores its core business.

Founded in 1914 by George Coles, it posted its fastest quarterly sales growth in nearly three years in October as promotional toy offerings proved to be a big hit. ($1 = 1.3856 Australian dollars)