The Coles board announced its FY06 results yesterday. No surprises there. While cloaked as a results presentation, yesterday was the centrepiece of the defence against a takeover.

In the build-up, Coles ran self-congratulatory full page newspaper ads across Australia. Under the guise of praising staff, they trumpeted the rise in shareholder value under Fletcher’s five-year reign.

Now Coles is telling one third of their head office staff (2500 people) that they are out of a job before the end of 2008, and in the process sending a shocking message to in-store staff about their position on the totem pole. The Romans selected by lot and killed every tenth soldier as punishment for a defeat – decimation. Fletcher is going for one in three.

While it will save Coles $363m, it is a monumentally destructive announcement that will send a shiver through head office. The headhunters’ phones will be running hot in the coming weeks. The instability will get people thinking about moving on while they have control over the timing. Fletcher’s problem is that the best people find it easiest to unearth a new gig. In cutting a third of the headcount, Coles may lose 60% of the talent.

One senior retailer responded: Good to see that they’ve learned the lessons so well! Excellent way to send a message to your people. Apparently people who work in head office are “above stores”! He’s probably right in that they need to shed some people, but telling the market in this way completely b-ggers any communication they’ve carried out internally. Woolies must be laughing their heads off.”

By day’s end, CML shares had climbed on huge trading volume to an intra day high of $14.77 before settling a little. The market either loves the changes, or expects another bid. We suspect the latter.

The Coles board, having recently announced a strategy that resulted in the market valuing CML shares at $10.60, are trying to come up with something the market will value at $17 or better.  If a bidder puts $16 on the table, conservative institutional investors may find it impossible to resist the barbarian’s guaranteed shilling, rather than wait on a promised turnaround. The views of the business commentariat seem to be turning toward an inevitable sale.

We may see an offer any day now.