Wesfarmers wins Australia's Coles with $18 bln bid

By Victoria Thieberger

MELBOURNE (Reuters) - Wesfarmers Ltd. (WES.AX), which owns Australia's largest hardware chain, has agreed to buy retailer Coles Group Ltd. CGJ.AX for A$20.7 billion ($17.7 billion) in cash and stock, in the country's biggest takeover.

The deal, if approved by shareholders, will end a protracted process since Coles put itself up for sale in February after struggling with falling sales. Last year, it rejected two offers from private equity firm Kohlberg Kravis Roberts KKR.UL.

Wesfarmers, whose Bunnings is Australia's leading hardware chain, will pay A$4 in cash and 0.2843 Wesfarmers shares for each Coles share, valuing each Coles share at A$17.25 -- a 7 percent premium to Coles' Friday close.

Based on Wesfarmers last traded price, the equity value of the deal is A$20.7 billion. Wesfarmers will also take on net debt of A$1 billion.

"I'm surprised Coles is able to extract A$17.25 given that it appeared Wesfarmers were the only people at the table bidding for the assets," said Richard Herring, director at Burrell & Co. "Let's hope Wesfarmers hasn't underestimated the task ahead."

Shares in Coles, Australia's second-largest retailer, and Wesfarmers are suspended from trading and will resume on Tuesday.

Wesfarmers had to bid solo for the troubled supermarket chain after its private equity partners, Permira and Pacific Equity Partners (PEP), withdrew over the weekend.

The private equity firms were unable to make a deal stack up after a sudden jump in the cost of credit in U.S. markets over the past week, a source familiar with the situation said.

Wesfarmers was the only bidder for the entire Coles group after a rival private equity bidding group led by TPG TPG.UL quit the race last Thursday, also citing the rising cost of credit in the U.S. amid concerns over subprime mortgage loans.

Wesfarmers, which snared 12.8 percent of Coles in a share raid in April, said it expected to complete the deal in October and planned to hold on to all Coles businesses, which include 2,900 supermarkets, liquor stores, the Kmart and Target discount chains and Officeworks office supplies stores.

"VALUABLE ASSET"

"We're not unhappy. From our point of view, as a Wesfarmers holder, we're pleased to see it go this way," Argo Investments managing director Rob Patterson said. "It's a valuable asset. They (Wesfarmers) are going to work very hard on it."

Wesfarmers was aided in its cash and scrip offer by a 21.4 percent surge in its share price since late May as its prospects for winning Coles kept improving. Wesfarmers shares closed on Friday at A$45.73, a record high.

Coles shares closed on Friday at A$16.12. They hit a record A$17.89 in May, but had fallen back as rivals bidders pulled out.

The Wesfarmers' offer values Coles at 23 times forecast 2008 earnings, higher than local rival Woolworths Ltd.'s (WOW.AX) 21.3 times and British retailer Tesco Plc.'s (TSCO.L) 17 times.