There’s been speculation for weeks that the Wesfarmers-Coles deal might topple. I think the opposite is true. The Coles board has been meeting for two days and I suspect the lead agenda item is how to sustain the takeover.
The Wesfarmers bid is always described as being a $22bn offer, representing $17.25 a share. However, the scrip component of the bid meant that the market had the power to ultimately set the true value of Coles. At the moment, nervousness about the challenges Wesfarmers will face at Coles coupled with unrelated factors including coal shipments and subprime mortgages is driving the value of Coles down. In this morning’s ugly market, the Wesfarmers offer is worth about $15.44 for each Coles share, or about $18.5bn.
Coles shareholders are less pleased, but they have few options. Wesfarmers remains the best, and quite possibly the only, option for the Coles board and shareholders. Should the Wesfarmers bid fall over, the CGJ share price is likely to be back around $10 in a blink.
Coles insiders tell me that they are starting to canvas what might happen if the deal falls over. They don’t like any of the possible outcomes. All include a huge management cleano-ut, and a share price in free fall.
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Coles is floundering. It lacks direction or strategy. On news of the Wesfarmers deal, morale soared, but it would plumb new depths if the deal fell over.
Wesfarmers insiders give every impression of believing that Coles is a done deal. They are busy making plans for how they will face the challenges.
The reality is that Coles, Wesfarmers and the institutions have no realistic option; they must find a way to make this deal work.
Rob Lake publishes Brandish – Retail Intelligence, a fortnightly newsletter about things retail.
DISCLOSURE: My company Orex has recruited hundreds of managers for Bunnings and my wife owns a few Coles shares.