Wesfarmers chief executive Richard Goyder has finally mentioned an issue that has so far escaped journalists and brokers busy promoting a possible involvement by Woolworths in the Coles Group bidding process.
He told the ABC program Inside Business yesterday that he was concerned that if Woolies entered into the due diligence process for Coles, it could obtain information that could hurt Coles.
“We’d have a real concern if in getting access to data Woolworths was able to get information around property and information systems which impacted the everyday needs business and therefore impacted the competitive landscape around that business,” Mr Goyder told ABC Television.
“I think that’s something that needs to be carefully looked at because it wouldn’t be in the interests of Coles for that to happen or the long-term value of those, of the everyday needs business.”
And that is a very legitimate concern, not only for him and his company, but for Coles shareholders and shareholders and owners of all retailers.
Woolies won’t be let near the due diligence process for the supermarkets, petrol and liquor businesses: that would be too inflammatory. It is something acknowledged by some commentators but by very few brokers and investment analysts whose view on competition issues is myopic at best.
But if Woolies managed to get data on Target and Officeworks and then withdrew or missed on the process it would be in a position to attack Target and Kmart through its Big W discount general merchandise business which has been the worst performing part of the retailer in the past year or so.
Getting background information about Officeworks would enable Woolies to understand why that has been successful and profitable, and how to ramp up its own retail offer through Big W, Tandy and Dick Smith.
It is significant that Woolies, and another possible Officeworks buyer, Gerry Harvey’s Harvey Norman, have both failed to enter the office suppliers, So/Ho supply business, even though they could see the growing success of Officeworks.
But the two lazy retailers are ready to buy if the price is right and the opportunity arises; which is where the competition regulator, the ACCC, should step in and order Coles not to allow rival retailers into the data room.
Whether that should be extended to Wesfarmers is a moot point.
Wesfarmers would argue Bunnings is not a direct competitor of any other retailer and it isn’t.
But there are significant parts of Bunnings business which are in deadly competition with Kmart, Big W and a host of independents: lighting, hardware, outdoor furniture and garden supplies, are some areas.
Letting the likes of Woolies, Metcash and some foreign retailers, such as Tesco, into the data room is fraught with danger.
Tesco has never shown any interest in entering this market and can’t have a hope of winning unless it teams up with an Australian buyer, such as Woolies.
Just extracting information from the Coles data room would give Tesco a large short cut to starting up here, which would be an unfair advantage.
The ACCC should extract an enforceable undertaking from all companies in the Coles bidding process that the information will be destroyed if unsuccessful (that’s if they pass muster for entry).
But it is also a pity that no one has really raised another issue with Wesfarmers: the fate of its other businesses should it win Coles.
It has industrial gases, Energy, industrial products, insurance and coal. On Friday we got a reminder of the vulnerability WES has with its coal division which confirmed it has suffered a double digit cut in the price of its premium coking coal from its big mine in Queensland.
The news did what news of the Coles bid couldn’t do: put a dent in the WES share price.
Wesfarmers shares closed 22c lower at $38.78 on Friday.
The company said on Friday it had agreed to a ‘weighted’ price cut across its range of metallurgical coals from the Curragh mine of about 13.6 per cent on the previous year.
Wesfarmers Coal managing director Stewart Butel said the company was satisfied with the result, with Curragh’s hard coking coal prices maintaining market price relativity.
“Curragh metallurgical sales volumes for the 2006-07 financial year are expected to be in the previously stated range of 6.2 to 6.5 million tonnes, with first-half sales consistent with the upper end of this range,” Mr Butel said.
“Demand from customers in the second half remains strong.”
Even though these price cuts have been well telegraphed since late last year there are a few more punting players in the share register who would take fright at something like this and that’s not what WES wants because its strong share price is one of the keys to its Coles bid: the share price rose $2 after the bid was announced almost two weeks ago.
To have the share price now under pressure would send the wrong signal to Coles shareholders at a time when no one else can make a share and cash offer to give CGJ holders the capital gains tax relief they want.
A strong WES share price makes that much easier, especially when the attacks come from KKR, Woolies and any other self-interested party (such as investment bank, Merrill Lynch which last week said that the Coles bid was inappropriate for WES).
Wesfarmers Coal interests include the Curragh mine in Queensland which produces in excess of six million tonnes of coking and steaming coal per year, the Premier Coal operations in Western Australia which produces around 3.5 million tonnes of coal per year, and a 40 per cent interest in the Bengalla operation in New South Wales which is capable of producing more than six million tonnes of steaming coal for both domestic and export purposes.
