The weakness in the Coles and Wesfarmers share price has raised speculation that the $21.9 billion bid could be threatened.
But that's not quite the case.
Coles shares fell 40c to $15.10 on Friday and Wesfarmers shed 84c to $41.05.
The latest prices for the merger partners implies a $15.92-a-share offer for Coles, well under the $17.25 proposal unveiled a week ago today, based on Wesfarmers' bid of $4 cash plus 0.2843 Wesfarmers shares for each Coles share(and the 25c a share final dividend)
In fact it's around $3 billion less because of the lower price for WES shares.
Both the bidder and the target have the right to pull out if Wesfarmers' 20-day weighted average price stays below $41.16, and underperforms the ASX 200 by 10 per cent.
The WES offer had been based on a share price of $45.73 at the close a week ago last Friday week.
There's the question of the final dividend for WES which will be revealed around August 16 and if it's the same as 2006, it will be $1.50 a share.
The Coles offer will have to be discounted for that (although only for a few weeks as all shares eventually regain their pre-dividend levels, unless the overall market is weak and being sold-off).
But a more important consideration to remember is the final value to WES of its shares to be issued in the bid. That will in effect determine the value of the offer.
In a corporatefile Open briefing from the ASX on Friday, Wesfarmers Finance Director, Gene Tillbrook, was asked
"What share price will you use in your accounts to reflect the issue of equity?"
And he replied: "The accounting rules dictate that we use the share price at the time the Scheme is completed".
The price of the WES shares to be issued in the bid to Coles holders should not vary from the value in company's accounts.
That means that despite the $45.73 price a week ago last Friday which was used to produce the $17.25 valuation, the real price for the shares will be set in October, when the scheme of arrangement is finished.
Both companies are very unlikely to pull the offer if the share prices remain below the levels in the escape clauses.
If Coles was to try and trigger that to either extract better terms or look to do another deal, the share price would fold because it would not be supported by an offer, as it has been for months by the suggested $16.47 cash and shares (25 per cent of that shares) from WES in April.
The corporatefile interview probed WES CEO, Richard Goyder on whether the terms of the new offer could be changed.
Goyder played a very straight bat:
corporatefile.com.au
"Is the offer – of $4 cash and 0.2843 Wesfarmers shares for every Coles share – subject to variation in terms of the mix of cash and shares?"
Richard Goyder
"The offer is $4 cash and 0.2843 Wesfarmers shares for each Coles share. In addition, Coles shareholders will get the benefit of a fully franked 25 cent final dividend."
So at the moment no sign of any concession on the terms. But that's for the future when the scheme information is being prepared and both sides can assess the share price.
They have until early August to assess the performance of both share prices, so any speculation now is just that.
But in view of Richard Goyder's appearance on ABC TV yesterday, and what he said about WES' plans for Coles, take a look at some of these excerpts from Friday's Openbriefing.
He has the selling script off pat because there's not much different to what he told Inside Business yesterday.
……………..
We are 100% confident that with the combination of our management, and the existing Coles management, we will be in a position on day one to manage Coles' operations effectively. We are also reviewing ways to strengthen the management team through the completion of an international search exercise.
corporatefile.com.au
Are you comfortable with the fact that you'll now be owning 100% of the Coles businesses compared with your original plan of owning 100% of Target and Officeworks and 50% of the food, liquor and convenience businesses?
Richard Goyder
Irrespective of the structure, Wesfarmers was always going to have a major ownership position in all of the Coles businesses and accordingly we have done extensive due diligence on every business in the Coles group including the supermarkets, liquor and convenience businesses. As part of our evaluation of the 50% ownership outcome, we ran our traditional discounted cash flow models assuming 100% ownership of each business to ensure that the value was there irrespective of the ultimate funding structure. We have been completely comfortable on the outcomes of due diligence on each business and this analysis gave me and the Board of Wesfarmers the confidence to proceed with a 100% acquisition.
corporatefile.com.au
Richard, can you summarise why Wesfarmers is doing this deal?
Richard Goyder
The overriding reason is that we firmly believe that this acquisition will be value accretive to our shareholders. The Coles group of businesses are extremely valuable and comprise irreplaceable assets which operate in attractive markets. Supermarkets businesses in particular demonstrate the capacity to generate stable and increasing levels of earnings across all stages of the economic cycle.
We are confident that our profit improvement plan will add considerably to the earnings base of the Supermarkets' business. Target and Officeworks are well run businesses that will fit into the Wesfarmers performance-focused structure.
The attraction of the supermarkets business is that it provides a significant opportunity for Wesfarmers to add value through the application of its management structures and disciplines, which give senior man
