As expected the punters hopped into Coles shares yesterday, whipping them up to a day’s high of $17.08 before they settled back at a new record close of $16.86, 39c above the $16.47 offer price from Wesfarmers and its partners.
Coles shares actually closed at its day’s low yesterday as a dose of reality emerged: something was needed after 22.5 million shares were traded.
No doubt there were some clever hedge funds bailing out to lock in small but tasty profits on their play in the stock over the past couple of months: buying just under $15 a share and paying with borrowed money and running an options deal along side makes for a nice bit of cash when you can exit $2 a share higher in the space of a few weeks.
And that’s what Coles is now down to: hedge funds and other smart punters playing in the stock after the prospect of a major auction disappeared with the Monday night raid.
It is now up to KKR and its bunch of private equity buccaneers to take a risk and put their collective hands in their managed funds and pull out some dosh to stay in the game.
But the easy money has gone: no more locked in 20 per cent return on a strip and flip revamp of the ailing retailer; not when the option is being matched against the smarter group of raiders with mixed motives: a patient capital accumulating investor in Wesfarmers, some good advisers and some partners from private equity with the ability to fund WES’ ambitions.
Coles’ board hasn’t locked the door on KKR, it can’t, and it would be reputation damaging if it did. But they have left it up to the US private equity giant and its partners to make some tough decisions.
KKR and its partners will no longer be able to practice the ‘close hug’ approach to buyouts that was tried on the Coles board twice last year at $14.50 and $15.25 a share.
Compared to the first offer, which some people wanted Coles to accept, there’s another $1.97 a share on offer, plus the ability to offset capital gains tax with a part scrip offer. That’s something KKR can’t offer.
And with hundreds of thousands of small shareholders, that rollover offer should not be discounted, nor the fact that WES ‘ offer appeals to the Australian nationalist streak in many investors.
That’s the streak we are seeing driving much of the opposition to the Qantas bid.
Wesfarmers itself has tens of thousands of small shareholders mostly in WA because of its background as an old agricultural co-operative.
It’s that approach and the feeling Coles will remain in Australian hands that will offset the feeling of being let down by the retailer’s board and senior management over the Everyday Needs revamp debacle.
The Wesfarmers group includes Pacific Equity Partners, an active local buyout group in Australia and New Zealand, London-based Permira Holdings, the biggest private equity group in London (which traces back to an old Schroders merchant bank investment team) and Macquarie Bank.
Should the bid be accepted Wesfarmers will keep the Target and Officeworks chains while Coles’ supermarkets, liquor stores, Kmart and the Coles Express petrol business will be spun off to a venture half-owned by Wesfarmers and the rest owned by the buyout firms.
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If you want to know if there’s upside in Coles, take another look at the retail sales figures for January and February.
The two months saw strong growth for Australian retailing with food, clothing, liquor, department stories and homewares doing well.
That’s the bread and butter of retailers like Woolworths and Coles, and we know that of the two, only one did well and it wasn’t Coles.
In fact Coles missed the boom completely in the first half of the 2007 year
The months of January and February saw seasonally adjusted increases of 0.8 per cent and 0.9 per cent respectively but in the more important original dollars, the increases from January 2006 to January 2007 were around 7 per cent and 6.9 per cent from February to February.
Stockmarkets work off the original figures, economists work off seasonally adjusted numbers and at the moment it’s the headline figures which are more important to the market and investors than anything else.
Apart from Officeworks, Coles has completely missed the 15 months of ‘moderate trend growth’ in retailing referred to by the ABS in its commentary on Monday.
Very few other retailers didn’t: not Woolies, The Reject Shop, Metcash, Harvey Norman, Noni B and a host of others.
Sure some parts of retail groups (such as Big W at Woolies) were hurt by the rise in petrol prices last year and sales growth slowed, but Coles missed it completely, especially since the revamp based on the Everyday Needs concept last August-October.
These figures from the ABS confirm that it wasn’t a change in the economy or markets which caused Coles to misfire: it was management.
That’s fixable and that’s why there is still value in the retail brands at Coles and why Wesfarmers is now in the box seat, ahead of all the clever chappies from the private equity groups.
Now the task is to find a process which allows that to benefit everyone, especially shareholders.
It’s galling that CEO John Fletcher will walk away with a possible $50 million worth of shares and payments.
After his performance over the last year he should be donating money to shareholders, or better still a charity doing good works.
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So what sort of retailer is Wesfarmers?
It runs the Bunnings hardware chain and gets more than reasonable returns from a dominant position in a market not too dissimilar to mainstream grocery retailing: it has two or three major competitors and some smaller operators in regional and local markets.
In its interim profit statement Wesfarmers said:
“Operating revenue of the home improvement business i
