Solomon Lew and the private equity barbarians have won. This morning the Coles board released a shock profit warning, operationally side-lined CEO John Fletcher, and announced the giant retailing business was up for sale.

Rarely before has so much dramatic corporate news been dropped in a two page press release, so take the time to read it all.

The bad news was that the full year 2008 earnings forecast has been slashed by 10%, or $107 million, to $960 million. This is due to lagging supermarket sales after the board’s ill-considered strategy to ditch Bi-Lo and Kmart and rebrand them as Coles.

The 2007 forecast has been retained at $787 million, but only because grog sales, Coles Express, Target and Officworks are booming whilst supermarkets lag.

CEO John Fletcher personally took charge of supermarkets last year, but now he has been sidelined to focus on the forthcoming break-up or sale. Liquor and Coles Express boss Mick McMahon has been appointed chief operating officer of all the Coles retail businesses.

In ordinary circumstances, this would cause a share rout, but the reverse happened because of these words:

Chairman Rick Allert said that following a number of informal approaches to its advisers in recent weeks regarding potential ownership proposals, the Board had decided to commence a process to review ownership options for the company and its businesses.

The Board would decide whether a 100% sale or a restructuring of the Group, including demerger, would create greater value for shareholders than the current ownership structure and growth strategy. Mr Allert said that a formal process would be established – governed by strict protocols to ensure a rigorously competitive process – to receive and assess proposals from interested parties.

The giants of the private equity club — led by Americans KKR, Texas Pacific and Blackstone and Europe’s CVC — lobbed a highly conditional $14.50-a-share offer on the Coles board last September which was rejected.

The board today named $15.25 as the price that Carnegie Wylie had identified as a floor and the stock immediately rocketed $1.45 to a high of $15.95 – valuing the equity at $19 billion — before settling at $15.80 by midday.

Among the many questions raised by today’s development include these two:

  • Is Fletcher the most appropriate person to oversee this review when the discredited strategy of 2006 was his responsibility?
  • Should Fletcher remain in charge of the whole company when he was personally responsible for the laggard supermarket division?

Finally, it remains to be seen which of the barbarians is prepared to come back and pay more than they offered last time. All this makes a heady political mix as the federal government decides whether to allow Qantas to be swallowed.

Disclosure: Stephen Mayne sold 30 of his 50 Coles shares at $15.91 this morning.

Peter Fray

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