Last night Coles Myer announced that it had rejected a $14.50 per share takeover bid led by leveraged buyout king, Kravis Kohlberg Roberts. In a media release, Australia’s largest employer noted that the bid was conditional on open ended due diligence, provided no certainty on the availability of debt finance, provided no certainty on the bidder’s own equity finance and provided no clarity on the terms of the potential scheme. Coles Chairman, Rick Allert, also noted that the conditions would have effectively given the consortium “a free option over the company”.

There is no indication of that the consortium will do now. Previously, it had claimed that the consortium would not proceed unless it received board approval.

As noted by Alert, the KKR consortium seems to be made up of most of the private equity players in the Australian market, including Bain Capital, Carlyle, Macquarie, CVC, Merrill Lynch, Texas Pacific/Newbridge and PEP. Coles alleged that KKR hooked up with virtually every possibly competitor to reduce the chance of someone bidding against them. That seems to be a fair assumption. KKR wouldn’t have had too much trouble raising the money themselves. This transaction would be around half the size and 20 years after the legendary RJR Nabisco deal (of Barbarians at the Gate fame).

Sidelining every possibly competitor is a variation of the tactic used by takeover players which involves giving every large investment bank a retainer – just so they don’t turn around and act for the other side (this happened on the Westfield deal a few years ago, when Frank Lowy hired virtually every investment bank in Australia to advise on Westfield’s three-way merger). This also occurred more comically in KKR’s Nabisco deal. In that instance, KKR paid legendary investment banker, Bruce Wasserstein (who was then with Wasserstein, Perella, but now runs Lazard), a staggering US$25 million fee just so that he didn’t advise rival bidder, Shearson (Wasserstein was the fourth advisor that KKR had hired). However, after agreeing to pay Bruce US$25 million, KKR was so concerned that Wasserstein was leaking information that they excluded him from key meetings. In effect, KKR paid Wasserstein US$25 million to do nothing. Nice work if you can get it.

With Coles rejecting KKR’s bid, KKR must either walk away, go hostile or change their terms. The juiciest scenario would be a hostile private equity buyout. However, that may very much depend on how good Henry Kravis’ memory is.

Disclosure: The author has an economic interest in the performance of Coles Myer shares.

Peter Fray

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