Wesfarmers is the closest thing Australia has to an entrepreneurial conglomerate but they’ve actually been quite conservative over the years, missing out more often than winning in competitive auctions for assets. Dyno Nobel, Incitec Pivot, Orica and WA News are just some of the businesses that passed them by.
The ultimate measure of risk for a company is the level of debt it is prepared to take on and, for all its supposedly swashbuckling raids, Wesfarmers only had about $2 billion in debt supporting its $14 billion market capitalisation before Monday night’s $2 billion raid on Coles.
The retailing giant is even more conservative, supporting just $1 billion in debt on its $19.7 billion equity valuation based on the $16.47-a-share Wesfarmers bid.
However, all that is about to change in what could be a seismic moment for our major listed companies. Private equity have been out-smarting and out-bidding listed rivals for the last couple of years but with Coles they appear to have been beaten at their own game.
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There is something quite illogical about a $14 billion company bidding $19.7 billion for Coles, but the secret is loading up the supermarket business with debt and keeping this off the balance sheet.
The $2 billion spent by Wesfarmers so far on the 11% stake in Coles will effectively become the equity for its 50% interest in the supermarket, liquor, petrol and Kmart joint venture. A valuation of $13 billion is being talked about, comprising $4 billion in equity and $9 billion in debt.
Wesfarmers will still have to pay up to $5 billion for Officeworks and Target, bringing the total spend to $7 billion. However, there is already talk that it will sell its fertilizer business for about $1 billion and then you have the Coles shareholders who will elect to take Wesfarmers scrip to rollover their capital gains tax liability.
All this means that the Wesfarmers consortium is looking to borrow about $14 billion, loading up two icons of Australian business with a truckload of debt. They are doing this with some private equity backing but also offering CGT rollover relief, something which is not available to KKR and its totally foreign bidding syndicate.
The rest of Australia’s listed company sector will be watching with interest, wondering if it is time they too embraced the debt frenzy in this unprecedented era of easy credit.
It will be interesting to see if NAB, chaired by former Wesfarmers CEO Michael Chaney, helps out with the financing, especially given that Patricia Cross is a common director.