The chances of a private equity takeover offer for Coles Group have lessened with reports from New York this morning suggesting that the Blackstone Group is no longer interested.

Blackstone had been one of three private equity groups left in the consortium now led by TPG. Carlyle Group is the other.

Quoting “a source” Reuters reported that “Blackstone Group has become the latest firm to pull out of a group bidding $16.7 billion (U.S.) for Australian retailer Coles Group Ltd., a source said, further boosting the prospects of rival bidder Wesfarmers.”

Blackstone floated last Friday with the shares, issued at $US31, running up over $38 a share. But they have since fallen sharply on worries that the private equity boom may be over and that private equity firms may get hit by higher taxes.

Reuters said Blackstone and Coles declined to comment Wednesday, and a spokesman for the consortium could not be reached.

Senior TPG executives were due to make presentations at a partner conference in Aspen, Colorado on Tuesday, about whether to lodge a bid for Coles. No announcement has been made by TPG.

Coles has set a deadline of 9am Saturday (June 30) for binding offers for all or part of the company.

But this is not the only deal facing problems. US reports say the financing of several multi-billion dollar buyouts have been pulled or delayed in the last 24 hours.

US Foodservice (being sold by big Dutch retailer, Royal Ahold) has postponed the financing backing its $US7.1 billion buyout by Clayton, Dubilier & Rice and Kohlberg Kravis & Roberts due to weak market conditions.

It was forced to cut the size of a bond offering last Friday and lift interest rates. But even that couldn’t get investors interested. The bond offering was originally $US2.1 billion, it was cut to $US1.6 billion and then, finally, $US650 million. There were no takers.

And Goldman Sachs postponed a financing for the $US1 billion buy-out of Myers Industries until after the July 4 holiday to allow markets time to settle.

“Risk aversion” is now a phrase being used more and more by market commentators. It is coming from the collapse of the subprime mortgage market in the US and the way it was financed by highly leveraged and little understood financial derivatives called CDOs, or Collaterallised Debt Obligations.

Some analysts are now pointing out that corporate debt has been repackaged in ways similar to the way subprime mortgage debt was: by being cut up in smaller sections and turned into new financial products, like CDOs. The idea was to spread the risk wide but not leave it concentrated in few hands, as has happened in the past with junk bonds.

But CDOs are now being referred to a “toxic debt” and those who safely proclaimed that the collapse in the subprime mortgage market and the slowdown in housing wouldn’t hurt the other financial sectors and the wider economy, are being forced to reassess those claims.

Even the news of a halving in its $US3.2 billion bailout of a CDO hedge fund by investment bank Bear Stearns hasn’t helped sentiment.

Wall Street rose by 90 points on the Dow, but that was because the US economy showed a surprise slide in activity in May with orders for manufactured goods falling sharply.

US bond market yields are still around 5.08% because of the continuing demand for safe, non speculative investments.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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