Wesfarmers which has already started selling home automation gear via its Bunnings Hardware stores is set to take over Coles, the owner of Harris Technology, OfficeWorks, K Mart and Target.
Wesfarmers Ltd, Australia’s biggest home-improvement chain, agreed to buy Coles Group Ltd. for $20.7 billion to become the nation’s largest retailer.
Coles shareholders will get A$17.25 in cash and stock, 7 percent more than the latest closing price, the Melbourne-based company said in a statement today. The takeover is a record for Australia.
Wesfarmers was the only bidder for the company’s 3,000 supermarkets, discount stores and office supply outlets after buyout firms TPG Inc. and Kohlberg Kravis Roberts & Co. dropped out of an auction. Chief Executive Officer Richard Goyder plans to revive sales at Coles, which are growing at the slowest pace on record, by winning back customers from rival Woolworths Ltd.
“Over the last six months Coles management has been more focused on doing a deal than running the business,” said Steven Robinson, who helps manage A$550 million at Alleron Investment Management in Sydney. “You saw in the last quarterly numbers that sales weren’t as strong as expected.”
Wesfarmers owns 12 percent of Coles after buying shares in April at A$16.47 each, including a 5.8 percent stake held by former Chairman Solomon Lew. Under that deal, Wesfarmers agreed to pay Lew extra if it increased the offer to other shareholders.
Coles shares closed June 29 at A$16.12, and were suspended today. They have fallen 10 percent from a record A$17.95 on May 14 as the prospects of a bidding war diminished.
Coles Vindicated
Investors will receive A$4 cash and 0.2843 Wesfarmers shares for each Coles share they own. They will also be entitled to a 25 cent dividend, which will be paid by Coles before investors vote on the bid in October.
Coles Chairman Rick Allert said today’s deal vindicated the board’s decision to reject a A$15.25 a share offer from buyout firms led by KKR in October. Coles shares were trading at A$11.70 Aug. 16, the day before the board first revealed the KKR approach.
Wesfarmers shares closed Friday at a record A$45.73, valuing the Perth-based company at A$17.7 billion.
Including debt, the offer values Coles at A$22 billion. That tops the A$16.6 billion Mexico’s Cemex SA agreed to pay for Rinker Group Ltd. in April, at the time the biggest takeover of an Australian company.
The deal takes the value of announced takeovers in Australia this year to $113.8 billion, compared with $70.3 billion at the same time last year, according to data compiled by Bloomberg.
Solo Bid
Goyder decided to proceed with a bid after his buyout partners, Permira Holdings Ltd. and Pacific Equity Partners, withdrew just before the June 30 deadline for bids because of rising borrowing costs.
Under his original proposal, Goyder would have taken control of discount department store Target and Officeworks and split ownership of the supermarkets, Kmart, liquor and fuel outlets with the buyout firms.
Wesfarmers will now retain all the Coles assets, enabling Goyder to overtake Sydney-based Woolworths as the nation’s biggest shopkeeper. Wesfarmers owns the Bunnings chain of do-it-yourself stores.
“It’s a risky acquisition, there’s no doubt about that, but it’s potentially a company maker as well,” said David Spry, an analyst at FW Holst & Co. in Melbourne.
Deutsche Bank AG and Melbourne-based Carnegie, Wylie & Co. advised Coles. Wesfarmers is being advised by Gresham Partners and Macquarie Bank.
For Sale
Wesfarmers was created as a farmer-owned co-operative in 1914, the same year Coles opened its first supermarket in the Melbourne suburb of Collingwood. Goyder, 47, became just the seventh man to run Wesfarmers when he was promoted to CEO two years ago.
Coles put itself up for sale in February after the failure of CEO John Fletcher’s A$910 million program to increase sales by rebranding most Bi-Lo discount supermarkets and Kmart stores under the Coles name and opening so-called “supercenters” combining groceries with discount department stores.
Coles operates Kmart under license from Hoffman Estates, Illinois-based Sears Holdings Corp.
Goyder said he will focus on improving customer service to win back customers.
“How you improve any retail business is improve the product offer to customers,” Goyder said on a conference call. “This isn’t an overnight turnaround, this is something that will take a lot of time.”
Credit Defaults
Coles’ sales rose 0.6 percent in the 13 weeks ended April 13, the slowest quarterly growth on record. Woolworths sales in the period climbed 8.8 percent.
Wesfarmers will issue as much as A$14 billion of stock and take on A$8.1 billion of new debt to fund the deal.
The perceived risk of owning Coles bonds fell after the deal was announced. The retailer’s BBB credit rating, the second-lowest investment grade, was placed on review for a possible upgrade by Standard & Poor’s.
Wesfarmer’s A- rating is on review for a possible cut at S&P.