There have been reports in the Financial Review and that business journal of record, The Daily Telegraph, that TPG may be close to pulling out of the consortium formerly known as KKR, leaving that bid for Coles in tatters.

It seems that TPG has been in talks with Woolworths with a view to bringing them into their consortium. The sticking point is that TPG wants Woolworths to pay over the odds for Target and Officeworks and Woolies is less than totally willing. TPG has a point – it seems fair enough that the cream should cost more than the milk or the whey.

Woolworths and Wesfarmers bid members believe the TPG consortium is losing momentum and crumbling.

If Woolworths are unable to cut a deal with TPG, it is almost certain they will throw in their own bid for Officeworks and Target, and Coles will welcome them to the data room.

On face value, the Coles board would want a new bidder, but it would bring some interesting dynamics to the process. Woolworths, as a late entrant to the data room, would need more time. The current processes involving TPG and Wesfarmers should see their offers (if any) on the table late this month. Woolworths would have absolutely no hope of meeting that deadline.

There are issues around Woolworths doing due diligence. Coles, the ACCC and the other bidders will not want Woolworths anywhere near the numbers on Coles supermarkets or fuel businesses. There are many cost centres for Coles’ businesses that are shared, so it will be very difficult to show Woolworths the numbers on the businesses for which they are bidding without also allowing them to glimpse things they should not see. Thus, any Woolworths bid will inevitably be partially blind, based on limited information.

That aside, Coles advisors will see the entry of a new bidder as having the potential to put upward pressure on the final price. It could push it up by $1 a share. However, as Coles’ performance continues to slide, a result of flawed leadership and recent poor decision making, the value of the company diminishes. Add the time value of the money involved and it isn’t hard to see that dollar being knocked off the bid price during any delay. All the entry would achieve is more uncertainty and a delay in finalising the deal.

A Wesfarmers bid can probably be concluded two or three months before a Woolworths bid. Institutional shareholders, who must be losing patience, may push for greater certainty and a faster resolution.

So now, to my nine reasons why the Wesfarmers bid is compelling, I can add a tenth.

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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