I think I know what really happened to the bidders in the consortium formerly known as KKR. They blinked.

Like any auction it’s great theatre, and it’s at least as much fun being a spectator as being a bidder. But it’s high drama – and very stressful. That’s why you regularly see bidders at an art sale stopping well short of the real price they were prepared to pay: they believed they could not win. I have kicked myself for dropping out in exactly those circumstances.

To date, three have departed, another is rumoured to be close to exit and one of the remaining pair has been regarded as less than totally committed all along.

Wesfarmers is starting to look unstoppable. How could they have spooked KKR and friends at the clearing house? Let me count the ways.

  1. It is Australian, and we can expect to hear more about that.
  2. Rumours of Macquarie unsuccessfully trying to buy parcels of CGJ from institutions for $17.25 suggested willingness by the WES consortium to bid at least that much.
  3. It has internal support with Coles managers who see WES as the preferred outcome
  4. They already own a potentially crucial 13% stake.
  5. Mum and Dan investors, by accepting WES scrip for CGJ scrip need not get an unpleasant CGT assessment. 
  6. The same Mums and Dads love WES and its long record of growth and healthy dividends.
  7. It is easiest outcome for ACCC, foreign investment regulators and the government to swallow
  8. Through Bunnings, WES is an already successful retailer with talent on board to run Coles.
  9. Wesfarmers keeps demonstrating self belief, behaving like the winner.

Former UK supermarket heavyweight and fixit guy Archie Norman and former Coles chief Steven Cain are on the team. Cain is a talented and successful merchant who was seen as a potential successor to John Fletcher, but was moved on following what was widely regarded as white-anting by other Coles managers. We hear stories doing the rounds that Wesfarmers is already putting feelers out to bring the necessary talent together to run the new businesses.

Barbarians hate the silver medal. In their world, losing is a lousy reputation, and can start to look like a habit. It might be far preferable to walk away saying “we didn’t really want it anyway”.

A one bidder auction and a distressed seller is not the recipe for a high price. Coles will now desperately be trying to shore up the remaining member(s) of what is now the TPG consortium, and will be very happy to see long time nemesis Woolworths at the table.

Earlier this week there was a meeting of the Australian National Retailers Association. Chiefs Fletcher (Coles) Luscombe (Woolworths) Page (Harvey Norman) and Davis (Bunnings) were there along with other heavies. Wouldn’t we love to know what was discussed in the breaks over Twinings and Tim Tams.

I think the bookies should be now offering very short odds on WES buying Coles for between $16 and $17. The market seems to agree, pricing Coles only a few cents above the initial WES offer of $16.47.

Disclosure: My company Orex recruits managers for Bunnings and my wife should have sold her 700+ Coles shares a week ago when they were north of $17.80.

Rob Lake publishes Brandish – Retail Intelligence, a fortnightly newsletter and website.

Peter Fray

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