Australia's Coles up for sale, shares surge
MELBOURNE (Reuters) - Australian retailer Coles Group Ltd. put itself up for sale on Friday after receiving a number of takeover approaches, saying it believed it was worth more than A$18.2 billion ($14.3 billion).
Shares in Coles shares surged 10 percent to a record on the news, after months of speculation that Australia's No. 2 retailer was still a takeover target in the recent frenzy of private equity interest in Australian companies.
The retailer also cut it earnings forecast for 2008 by 10 percent, blaming lower than expected sales at its supermarkets and discount chain Kmart.
Coles, which rejected two offers last year from a private equity consortium led by Kohlberg Kravis Roberts, said it would consider whether a full sale or a restructuring, including the spin-off of key businesses, would create greater value than the current structure.
"It appears they've put themselves on the sales block," said Rob Patterson, managing director of Argo Investments, which owns 2.65 million Coles shares.
Coles last year rejected an A$18.2 billion bid by KKR, but a source close to KKR said on Friday it was not behind the recent approaches.
Coles, which last year sold off its Myer department store chain to a private equity group for A$1.4 billion, still retains 700 supermarkets, 800 liquor stores, and the Target, Kmart and Officeworks retail chains.
Last year, it launched a five-year overhaul to ditch the Kmart discount store and Bi-Lo supermarket brands, create superstores under the Coles banner, cut 2,500 staff and improve margins, and boost earnings.
"The company in their earlier statements had perceived that the value of the whole was substantially more than the market was giving it credit for," said Doug Little, investment director at Constellation Capital Management.
"These are all announcements which clearly allow people to focus on just really what the value of the businesses are."
However, the group cut on Friday it earnings forecast for 2008 by 10 percent and said its turnaround strategy would produce slower growth in future years than previously envisaged.
"They know they are not going to meet the profit (forecast) for 2008, things are not going well and they are going to end up splitting off the supermarkets business and this is a way of easing into this announcement," said a source familiar with the situation.
VALUED ABOVE PREVIOUS OFFER
Coles said the company has received "a number of informal approaches in recent weeks".
Coles Chairman Rick Allert said in a statement independent advice put the value of the company at substantially above A$15.25 a share, which was the level of the second KKR offer.
Allert said a formal process would be established to receive and assess proposals from potential bidders.
The company last year set itself ambitious cost-cutting and earnings targets, which many analysts said would be tough to achieve without risking the underlying business.
Coles has been consistently losing market share in its core supermarkets business to rival Woolworths Ltd, which is expected to report a surge in first-half profit next week.
Coles shares were 9.8 percent higher at A$15.92 at 0040 GMT against a broader market up 0.3 percent. They have rallied almost 50 percent from their August lows.
The company is trading at just under 22 times forecast earnings, compared with 24 times for Woolworths and 36 times for J. Sainsbury, Britain's No.3 supermarket which is a takeover target of private equity firms.
Analysts have said the supermarkets and liquor businesses alone could be worth up to A$13 billion, based on a multiple of 15 times earnings, while a lower multiple was likely to be applied to the non-food businesses.
(Additional reporting by Sonali Paul and Michael Smith)
($1=A$1.27)
