Investors looking for guidance from big broking houses on the Wesfarmers rights issue at an expensive $29 a share might find it tough to locate some straight up and down advice and a recommendation, if that’s what you are looking for.
The Wesfarmers’ fund raising underwriters group includes ABN AMRO, Deutsche Bank, Goldman Sachs JBWere, JPMorgan, Macquarie Capital Advisers and UBS. All significant brokers and banks with lots of clients.
Among the majors though there are at least three not involved: Citigroup, CSFB (Credit Suisse) and Merrill Lynch.
And yesterday a couple of those issued differing appreciations of the WES offer and state of the Coles retailing group.
In fact the two opinions were very different.
Merrill Lynch issued a very strong ‘sell’ recommendation for Wesfarmers in the wake of the company’s 1-8 $2.5 billion rights issue.
In a note to clients, Merrill Lynch said while the capital raising was "the right thing to do" it was a "suboptimal solution".
As a consequence Merrill said "Sell Wesfarmers – the Risks are now too high".
"To be up front, we think that Wesfarmers is undertaking the correct strategy in raising equity rather than pursuing debt renegotiation. However, we believe that Wesfarmers has compromised itself and is in a very poor position – which it is attempting to work its way out of at a very high cost.
"It needs remembering that only 9 months back, Wesfarmers’ intended equity exposure to Coles was to be limited – to only $5bn for Target and Officeworks (100% WES) and only $2.0-2.5bn for Food & Liquor and Kmart. The other $13bn (for F&L and Kmart) was to be financed by private equity and non recourse debt.
"When the debt markets “melted”, Wesfarmers elected to take on the extra $13bn – because it saw its corporate debt as being much cheaper than non recourse debt. That its corporate debt cost is now higher than its cost of equity is almost an unbelievable situation. We estimate Wesfarmers cost of equity to be 12% (pre tax).
"And what is worse – Coles is broken….and deteriorating….Certainly that is our interpretation after viewing today’s numbers. To put in context, Food & Liquor delivered 3.2% comp sales growth in 3Q08 with 4.5%inflation – implying real growth of negative 1.3%. And that is compared to this time last year when we estimated Coles real growth to be negative 4%.
"Coles is going backwards from an already disappointing trading position. And Kmart and Officeworks are also performing poorly….off very low bases.
"Sell Wesfarmers – the Risks are now too high."
"We have a very strong opinion of Wesfarmers management, but we are concerned about the execution of the Coles acquisition.
"Both the ideal ownership structure of Coles and the cost of finance has materially been compromised – and that greatly disappoints us and causes us concern. Wesfarmers paid nearly $20bn for a business that is under duress – and is earning cash EBIT of around $700m. Even on a reported EBIT basis, Coles only generates EBIT of around $1bn.
"With a weighted average cost of capital that now must be well into double digits – we just cannot agree that the Coles acquisition is a good transaction," Merrill Lynch said in the report.
In contrast Citigroup was far more positive in its note to clients, writing "We maintain a positive view about the turnaround potential at WES.
"The deal removes refinancing as a risk factor and now the focus will turn towards the retail recovery.
"The signs from WES’s 3Q08 sales are positive for both Coles and Kmart, with improved sales relative to industry growth.
"Retailing improves — Food & Liquor and Kmart have shown solid sales improvements in 3Q08 compared with the last reported result in 4Q07.
"While market share still declined, the growth is converging towards industry levels. Bunnings had an outstanding result with an acceleration in growth relative to its rivals.
"Retail turnaround in focus — WES shares should now trade based on confidence in the retail turnaround.
"While macroeconomic headwinds persist, improved gross margin management and cost reductions at Coles will provide EBIT margin expansion over the next 12 months."
It’s one of those difficult situations with two opinions that are very chalk and cheese.
Meanwhile has Primary Health Care got a nibble on the line as it seeks to sell the consumer and distribution businesses of Symbion it acquired in its convoluted takeover?
Primary needs the money to improve its financial base, and it would probably be hoping for the $1.08 billion that Symbion was hoping to get from two private equity groups, Ironbridge and Archer Capital. That purchase fell over in the to and fro of the Primary pursuit of Symbion.
And, while it established a value for the assets, it was also set a fair while ago and there has been a worsening in credit conditions and a sharp rise in interest costs, which would make getting $1 billion a big ask.
But other potential buyers are said to be in the wings:Pacific Equity Partners, a couple of drug companies and a big US group, McKesson.
But grocery and liquor wholesaler, Metcash reckons it could be interested, in tandem with the struggling Sigma Pharmaceuticals.
They confirmed yesterday they might team up and bid for some of the assets of the Symbion.
"Metcash and Sigma are investigating the possibility of jointly bidding for Symbion’s consumer brands and pharmaceutical
