When the Coles board mistakenly thought they had a CEO who knew how to run shops and told KKR to get lost, the private equiteers didn’t waste much time sulking. The problem for Coles now might be whether KKR is still interested given the other shop shopping they’ve been doing.
Overnight KKR successfully offered $9.2 billion for US discount retailer Dollar General and made a first pass of $23.9 billion for the UK chemist shop chain Boots.
The Boots bid, in partnership with the company’s deputy chairman and 15% owner Stefano Pessina, has been initially dismissed by the board as being too low, but it’s early days yet.
More importantly, it says plenty about the scale and speed of the games being played when fingering $33 billion worth of cloth is all in a day’s work. But even for a mob the size and structure of KKR, Coles shareholders might wonder if there’s a limit to its immediate money supply.
The answer probably is: not yet. Both the rise and rise of the private equiteers and the lack of a meltdown in the US over the growing sub-prime mortgage lenders crash stem from the world being awash with liquidity.
The equiteers are being fuelled by banks and institutions desperate to lend and invest funds, while the mortgage security market is being underwritten by other countries’ trade surpluses.
There’s nothing like China announcing a monthly trade surplus of US$23.8 billion to spark US calls for punitive tariffs, a free floating renminbi and a gunboat up the Yangtze. OK, maybe not the gunboat, but gee weren’t they the good old days… And that results in the usual Chinese response.
But, as Macquarie Bank international economist Mark Tierney wrote to clients this morning, it’s the Chinese surplus, with help from a few others, that’s keeping the US mortgage industry afloat despite the increasing bad news. Writes Tierney:
- It is clear that there is still a group of buyers with deep pockets who are gobbling up US mortgage-related securities. These are foreign official institutions. Huge inflows into US agency securities over recent months have undoubtedly supported the flow of financing to the broad US mortgage market.
- Will this continue? Well with China just announcing a trade surplus of $23.8 billion for February, bringing the 12-month rolling sum to $205.2 billion, there may well be one very large buyer of US mortgage securities.
- The key issue is that the blow up in the sub-prime mortgage market is happening when global liquidity growth is roaring. If it had happened when monetary conditions were tightening, the outlook would be dire indeed.
But when the chase for yield is so intense, there is a reasonable chance of limiting the contagion effects.