Retail expert Rob Lake writes:

With a bidding war now on
the cards and the Coles share price on the rise, CEO John Fletcher must
be thanking his lucky stars. Before his eyes a mediocre record of
missteps and missed opportunities is being turned on its head. And if a
sale comes off, Fletcher will go down as the CEO who brought home the
bacon for Coles shareholders.

Ironically, it’s happening
precisely because Fletcher hasn’t been great at running the company.
Private equity buyers have little interest in targets performing at or
near their potential. They seek opportunities for quick multiples and
someone must perceive huge unrealised potential in CML. Coles is a
renovator’s dream because buyers think they can make improvements that
have proved beyond the current management.

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In fact, for the past
two decades Coles Myer has had a miserable time, punctuated with the
odd success like Officeworks. The board and Fletcher fail to understand
that Officeworks was a winner largely because it was run so very differently
from the rest of the corporation. Meanwhile John Fletcher has patted
himself on the back for reaching his last five year profit goal. He has
achieved it partly by keeping maintenance and depreciation at
artificially low levels, resulting in paint jobs, trolley repairs and
new fluoro tubes being described as capex in the recently announced
five year strategic plan – a plan given the thumbs down by the market.

The
CML share price that tanked from $11.75 to $10.60 following Fletcher’s
announcement a little more than a fortnight ago has now gone ballistic.
$13.10 last night and this morning to $13.59.

My wife owns 762
Coles Myer shares. They were acquired many moons, years, so she would
get a shareholder discount card that might save a few shillings each
week at the grocer. She was not alone. And should Coles want to defend
against a hostile bid, that could prove a problem. Coles’s ownership
register is chocka with mums and dads who, now that the discount card
has vanished, would love to sell their little parcel, if only someone
would make it easy. They never quite understand the buy-back offers, so
if they get a nice simple “sign here and you’ll receive a cheque”
letter, they are out of there. We should not be surprised to hear David Tweed is having a go, but we wonder why he hasn’t done so earlier.

Coles
also has one very large and frequently very critical shareholder in
Solomon Lew. Lew’s stake, through Premier Investments, may be the key
for any bidder. Given his attitude to the current board, it is not
unreasonable to speculate whether he might have a hand in this. So who
is it? Harvey Norman denied involvement. Wal-Mart? Tesco? Private
equity? The sun set last night with the money on the Poms but rose with
talk of KKR.

With 165,000 staff,
Coles is Australia’s largest private sector employer. It is an Aussie
icon and this must bring a political edge. Although very few foreign
investment proposals are blocked; the public reaction to foreign
ownership of Tim Tams, Speedos and the Snowy Hydro may have nothing on
this. Does the federal government have the will or courage to intervene?

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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