Wesfarmers has ambitious plans for Coles if its takeover is successful.
But it will come at a cost, besides the mooted $21 billion value in shares and cash.
(The merger won't be valued at that if consummated, as the sell-off in the stockmarket will mean the actual values will be lower.)
Wesfarmers said yesterday that it plans to spend up to $5 billion over the next five years, reshaping and transforming the stumbling retail giant.
Between $1 billion to $1.2 billion will be spent in each of the 2008-09 and 2009-10 years.
It's looking for annual cost cuts of at least $385 million. Based on 2008's expected net profit of around $780 million (Coles' own forecast), the cost-cuts would push earnings close to a billion a year by from 2010 onwards.
WES plans to create three new businesses to integrate Coles Group into its structure, but the Kmart discount chain looks like it will be unwanted, leaving open the possibility that it could be sold to groups like Myer (owned by TPG), Woolworths or another ambitious group.
WES said in a statement to the ASX, which accompanies news of lower 2008 earnings, that the three new business divisions will be: Food, Liquor and Convenience; Big Box retailing to include Wesfarmers' Bunnings hardware business and Coles' Officeworks; and Target.
Kmart unit will be operated as a separate division while it undertakes a review of various options for the business: there's the suggestion it couldbe sold off.
Woolies has been sniffing around looking for either Officeworks and/or Target, or parts of Kmart.
It may end up being a decision for the ACCC.
Wesfarmers says it expects the corporate overhead cuts of $385 million a year will be in place late in the 2008-09 financial year (or just under two years time).
This figure will include $100 million in savings already achieved under Coles' program announced almost a year ago.
WES said supply chain cost savings are projected to reach $540 million a year by 2013, including $90 million achieved to date.
This looks like the same programs that WOW has all but finished in re-organising its distribution and store delivery and ordering processes.
Wesfarmers managing director, Richard Goyder, said in the statement that Wesfarmers and its supply chain consultants had thoroughly reviewed the current cost savings program.
"The principal beneficiaries of the program, the Food, Liquor and Convenience division, will become responsible for the delivering of the benefits," he said.
He said in the short-term, the goal will be to reverse a decline in sales at Coles, including its supermarkets, and target comparable store sales growth of 3% to 3.5% by 2009-10.
Seeing WOW's comparable store growth is running at double that rate, and Coles rate is around 1% (at the half way mark), it's going to be a big ask, and a big part of boosting margins and profits.
Mr Goyder said that each 1% increase in comparable store sales growth a year "is estimated to generate an earnings before interest and tax benefit of about $150 million in year five, before new store rollouts".
The Kmart review will be based on three options – improving the trading performance of the existing businesses, converting some stores to other formats and a sale of part or all of the business.
"It is my strong preference to retain Kmart but all ways of maximising shareholder value need to be considered, including a combination of the three options identified," said Mr Goyder.
Mr Goyder also said Coles' Tooronga headquarters in Melbourne would be abandoned as the business conforms to Wesfarmers' streamlined corporate model.
"As is well known, Wesfarmers has a very small corporate office which provides specialist support to the business divisions," he said.
"Under our ownership, each of the current Coles businesses will be given the resources they need to operate most efficiently rather than having to rely on functions centralised at the Tooronga head office.
"I want the divisional back up to be moved as quickly as possible out of Tooronga and into the operations.
"We plan to exit that building as soon as is achievable, subject to the current lease arrangements.
"Our detailed assessment of all the Coles businesses shows they meet our key investment criterion in that they will deliver a positive net present value for Wesfarmers and will therefore create value for our shareholders. Target and Officeworks will be value accretive from the date of acquisition and we see substantial value creation in the food, liquor and convenience businesses in the medium term."
"Consistent with the existing Wesfarmers' divisions, these business groups will report to the Wesfarmers Managing Director who will chair the board of each new division.
"Our management philosophy is built around having a lean head office that provides only services that add value to the operating businesses and divisional offices that recognise the specific needs of each business. Each business is given the authority and responsibility to manage their operations," said Mr Goyder.
Wesfarmers has developed a tailored management strategy for the Food, Liquor and Convenience Division, which will include the addition of international retail expertise and strong incentives to drive management performance.
"John Gillam, who has very successfully run Bunnings since 2004, will be the managing director of the combined Bunnings/Officeworks businesses," said Mr Goyder.
"Commercial executives from Wesfarmers will join the leadership team of each of the new divisions and I will be appointing a senior Wesfarmers person to oversee the entire integration process.
"As previously advised, senior managers for the Co
