Yesterday’s late breaking rumour about Wal-Mart buying Coles, bundled with a partial break-up, received a big run locally and overseas. Some greeted it with surprise. CML shares have jumped past $14.50, trading at $14.62 late this morning, so others believe a higher bid is on.

This morning a second source confirmed that Wal-Mart executives have been at Coles’ Tooronag HQ in Melbourne checking out the books. So what’s the attraction?

Buying Coles is the easiest, and possibly the only way for the world’s largest retailer to get a piece of the Australian market. The Kmart, Coles and liquor businesses are a good fit with what Wal-Mart does well.

Wal-Mart is running out of growth opportunities in the US. A traditional measure of retail performance, particularly in growing companies, is to compare the sales on a same stores basis. Analysts can no longer do this with Wal-Mart. As Wal-Mart stores approach ubiquity across the US, each opening cannibalises existing stores. To grow, they must move offshore. Wal-Mart has been burnt in several overseas ventures, struggling in Japan and recently retreating from loss making ventures in South Korea and Germany. The cultural, language and economic similarities presented by an Australian opportunity must seem very appealing.

Target would be a logical buy for Solomon Lew. Target is moving up-market, developing a more fashionable offer and winning increasing cred with women. Through his various companies, (Playcorp, Voyager, Housewares International) Lew has almost every merchandise category covered. As a born and bred merchant who seems to pine for the cut and thrust of retail, it might be just what he’s after. Lew buying Target may also bring the curtain down on one of our hottest corporate feuds.

Officeworks to Harvey Norman is a good fit that lends itself to Gerry’s preferred model of franchising stores, improving their performance with involved owners.

However, there are arguments against the deal.

Wal-Mart would be paying something like a 20x multiple for CML. Could they sell this deal to their own shareholders when Wal-Mart shares trade at an 11x multiple? They might argue that while it’s an initially scary multiple; this is a never to be repeated opportunity with earnings that can be quickly improved with better management.

Jack Shewmaker is a former Wal-Mart President, retiring in 1988. Whilst remaining on the Wal-Mart board, he runs a consulting company that has advised Woolworths, particularly in relation to Big W. We know Jack is in town and he’s said to be with a number of other Wal-Mart Directors.

Shewmaker has been a long standing advisor and mentor to Roger Corbett. Is Jack here just for a knees-up to farewell Corbett, who retires at the end of September, or for a sniff around, wondering how he might buy the business across the road from the shop run by his old mate?


Peter Fray

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