Just when it seemed like the fiasco at the Coles Group had drawn to a close, the AFR revealed today that the merged retailer just “produced its best first quarter profit figure in five years.”

In a memo leaked to the paper, Fletcher noted to Coles executives that the September quarter was Coles’ “best start to a financial year in the last five, with the whole group comfortably above its budget… particularly pleasing is that all of [Coles’] key brands have exceeded their retail EBIT budgets, including supermarkets.”

Usually, the best profit result in five years is good news for a board and shareholders. However, the news isn’t so good when the company has been sold off to the highest (read, only) bidder a few weeks earlier.

Funnily enough, no word of the improved profitability was spoken to shareholders before they met on 7 November 2007 to approve of the scheme of arrangement with Wesfarmers. At that meeting, 99.25 percent of shares were favour of the merger. (Although in Coles defence, the improved profitability may not have been certain on 7 November, and also Fletcher noted that the improved profit merely meant that the company was on track to meet earlier profit forecasts).

Coles yesterday also announced final allocations in its mix and match facility, which allowed shareholders to choose between receiving maximum cash or maximum Wesfarmers scrip as consideration for the merger. Based on the current price of WES shares and the deferred settlement equivalent, the value being received by Coles shareholders (after the market opened this morning) is:

Election

Cash

Ord WES

PPS WES

Total

Maximum Cash

$9.61

$5.76

$15.37

Maximum Scrip

$2.96

$6.88

$5.76

$15.60

No election

$4.00

$5.82

$5.76

$15.58

On average Coles shareholders are therefore effectively receiving consideration of $15.48 per share from Wesfarmers (shareholders who hold on, will also reap any benefits, or losses, resulting from Wesfarmers’ management of Coles’ assets).

The $15.48 median consideration being received compares with a (not-necessarily best) offer from KKR of $15.25 per share bid in October 2006. Back then, in rejecting KKR’s offer, Coles chairman, Rick Allert, claimed that “the Board believes that shareholder interests will be better served by the company pursuing its growth strategy. We remain confident that this will create significantly increased value for shareholders.”

That “value” that Allert was referred to was a gain of 23 cents per share for shareholders – equivalent to a 1.5 percent “windfall”, over thirteen months.

During that same period, the All Ordinaries increased by around 32 percent. Main rival, Woolworths (which would have been a logical place for former Coles shareholders to transfer their holding) increased during that period by around 55 percent.

While Coles’ most recent results may at last offer some solace to departing John Fletcher – the improved profitability won’t provide much comfort to the departing Coles board.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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