Leading commentators, including  Bartholomeusz and Kohler in the Smage, have been talking up the possibility of Texas Pacific Group “going it alone” in a bid for Coles.

TPG Australian boss Ben Grey (son of former Tasmanian premier, Robin), along with Myer executives Bill Wavish and Bernie Brookes, are believed to be attempting to persuade TPG chief David Bonderman to bid for Coles, amongst the lavish confines of Aspen ski resort.

Bartho noted Myer’s results for the six months to January were “staggering” with “earnings before interest and tax (EBIT) up 84% to $123 million and the directors provided guidance for the full year of an EBIT outcome between $150 million and $170 million”. As a result of the increased earnings, potential sale of Myer’s Bourke Street premises and use of leverage, it is likely that “the new owners will probably have turned their initial $400 million of equity into something approaching $750 million. They will have nearly doubled their money in just over a year”.

However, before the cash registers start ringing too loudly, it is worth noting that while Coles sales have been tepid of late, it is far from the basket case that Myer was when Newbridge snapped it up for $1.4 billion last year.

It should be remembered that back in 2000, Myer Grace Brothers reported EBIT of $162 million – about the same as what the privately owned Myer is expected to report this year. Therefore, rather than undertake some sort of extreme makeover, Myer’s new owners have pretty much just restored Myer to its profitability levels of seven years ago (before inflation and population growth are even considered).

By contrast, in 2000, Coles Myer’s food and liquor group earned $471.3 million before interest and tax. Last year, Coles’s food and liquor group earned $785.9 million — an improvement of 67% — still well behind Woolworths but far better than Myer’s performance, which literally went backwards over that period.

Myer made the perfect private equity story. An under-leveraged retailer with millions of dollars worth of dead stock, which had been run into the ground for the past five years. While Coles won’t be fodder for any Harvard Business Review case studies any time soon, at least the food and liquor retailer has grown its earnings. Further, Coles looks like it will be bought on a far greater price/sales multiple than Myer was.

While leverage and supply chain improvements may make the purchase of Coles at a price of around $17.00 per share an astute deal, it looks very unlikely to be anything like the fairytale for PE that Myer has become.

Peter Fray

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Peter Fray
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