When the Coles board announced their intention to sell, Chairman Rick Allert made it clear that the options included a 100% sale or a restructuring of the group, including part divestment. As the process unfolded, all the focus has been on a sale of the whole. However, the likelihood of Coles encouraging a break up and sale of individual businesses has just increased.
Much as it will gall, Coles is now likely to encourage Woolworths as a free-standing bidder for the two jewels in their tarnished crown.
For a time the auction portents were good, with a couple of eager bidders attending the open for inspection. However, as one of the bidders appears to be wilting in the face of departing partners and the power of the Wesfarmers offer, Coles must somehow find a way to keep the auction alive and maintain upward price pressure.
Coles appears to have three options:
- Strengthen the TPG bid with additional players;
- Attract a new bidder;
- Break it into smaller parcels.
There is a fourth, but improbable, option. John Fletcher recently canvassed the possibility of the current board and leadership remaining should the bids fall short of what they feel is right. They have surely received the message that the market will not tolerate that outcome.
Much has been written about the possibility of Woolworths joining either the TPG or Wesfarmers bids. Wesfarmers does not need Woolworths and is unlikely to want them. Woolworths and Wesfarmers are both pursuing the same assets — Target and Officeworks.
These are the best performed businesses within Coles, enjoying strong sales and profit growth and each with an EBIT (Target 10+% and Officeworks 5+%) outstripping the rest of the company. The other businesses have inadequate sales performance and lower EBIT, with Food & Liquor under 4%, Kmart 3+% and Petrol just over 2%.
Additionally, Coles would not want anything to strengthen the Wesfarmers bid.
If Woolworths is to join a current bidder, it will be TPG. This produces a dilemma. Partnering Woolworths allows TPG to counter the Wesfarmers scrip for scrip offer so attractive to the huge Mum & Dad component of Coles’ register that will not welcome a CGT bill.
However, it brings a partner that really only wants the cream, leaving TPG to rescue the moribund food, liquor, petrol and Kmart offers, without the support of the better performed businesses, or the benefit of the Woolworths management expertise.
While the ACCC has not yet spoken, it is fairly certain that they will not allow Woolworths anywhere near the Coles supermarket and petrol businesses.
The Wesfarmers juggernaut seems unstoppable at a price somewhere short of $17. However, this is not over yet. Coles will be courting Woolworths, Harvey Norman and anyone else who can write a check for more than a billion who would like to own a shop or two.
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.