The $15.25 KKR threw on Coles’s table last Thursday was rejected in about two hours. Rather than call a trading halt, then spending a few days considering options, talking the deal through with KKR, other potential bidders and stakeholders; the Coles board sent the barbarians packing. No discussion and little justification.
Making such a big call without any discussion with key stakeholders was a mistake and it’s a decision that could come back to bite Allert and Fletcher. Concerns are mounting about a lack of transparency and legal action by investors has been mooted. Board gadfly Solomon Lew is in this morning declaring he’s going to try an unseat Rick Allert at the annual meeting next month. That may be par for the course for Lew, but there’s mood shift against Allert and Fletcher.
They are staking everything on a management restructure, a new supply chain system and some store initiatives. In the weeks since John Fletcher’s 21 September announcement of a reduction of around one third of head office staff much has been happening. As McKinsey works through Coles’s Tooronga headquarters, engineering the required pruning, productivity is suffering and morale is being shot to ribbons.
My day job is as a recruiter of retail management. The quality of the Coles people currently knocking at our door would horrify Fletcher. We believed the decision to shed a third of head office staff would result in losses of some good people, but what we are seeing appears likely to turn into massive blood loss. Coles will lose in three ways. It will have paid people handsomely to go, the talent will no longer be available to the company and, what’s worst, the skills come back to haunt them when the talent are picked up by a competitor.
Coles is part way through a critical supply chain overhaul that seems to be running over cost and behind schedule. Project Endeavour, the introduction of a new merchandise management system replacing an outdated, cobbled together system, is being further delayed as the company reintroduces category management. Category management was adopted by the whole industry in the early nineties. It was later abandoned by Coles, but is back in favour again at Tooronga. New regime, new system; back to the future. The recent departure of the head of merchandise may further damage the project.
The company continues to be an odd mixture of resistance to change coupled with seat of the pants, look after your mates management in which short term thinking can dominate decisions.
In rejecting the KKR offer, Allert and Fletcher have made a serious mistake and put their credibility on the line. They are staking their reputations on the success of the recently announced changes. Early signs are not good. One rumor doing the rounds has it that the haste with which KKR was sent packing owes much to a nasty surprise in the Coles books relating to the performance of K-Mart. There’s no evidence this is true, but it gives you a sense of the doubts gathering around the company.
When KKR withdrew, the Coles share price went into free fall as the hedge funds departed. It seemed headed back towards the $10.60 on offer before the bid. It got to $12.75 before bouncing a little to its current levels, supported by half a dollar of general market move and some lingering hope.
KKR, and their offer of $15.25, has gone – at least for 2006. If Coles fails to deliver on their profit target, we may see KKR, or another bidder, back with an offer that makes the $15.25 seem very generous.