Australia's Coles up for sale, shares surge

(Adds analyst comment, details on potential buyers)

By Victoria Thieberger and Michael Smith

MELBOURNE, Feb 23 (Reuters) - Australia's Coles Group Ltd. CGJ.AX put itself up for sale on Friday, saying it believed it was worth more than the A$18.2 billion ($14.3 billion) offer from private equity that it rejected just months ago.

Shares in Australia's No. 2 retailer surged 10 percent to a record on the news, which comes just six months into a five-year turnaround plan that was designed to fend off previous bidders.

A sale of the entire group would be the largest in Australian corporate history.

Coles said it had received a number of informal approaches in recent weeks, but declined to say whether they were from other retailers or private equity interests, and said no firm offer had been made. A source familiar with the situation told Reuters Coles had received approaches from three parties.

It said it would open its books to potential buyers and would consider a full sale or a break-up. The review would likely take three to six months, Chairman Rick Allert told a briefing. "As a buyer you could take the whole thing and split it up and get optimal returns," said Tyndall Investment Management analyst Craig Young, adding that larger rival Woolworths Ltd. (WOW.AX) would likely be interested in the valuable Officeworks or Target chains.

A break-up would be a reversal of Coles' own strategy, which was to fold the separate stores under the Coles banner.

The retailer said on Friday that sales have fallen short of expectations at its core supermarkets business, and it cut its earnings forecast for 2008 by 10 percent.

Coles rejected two offers last year from a private equity consortium led by Kohlberg Kravis Roberts [KKR.UL], the second of which was at A$15.25 per share.

The stock traded above that level for the first time on Friday, hitting an all-time high of A$15.95 before closing up 8.6 percent at A$15.75. Allert said Coles would not consider any offer unless it was substantially above the A$15.25 per share KKR offer. He said independent advice valued the company well above that figure.

A source close to KKR said on Friday it was unlikely to take a second tilt at Coles. However, another source said the three recent approaches to Coles had included KKR.

Coles' advisers also planned to limit the size of any future bidding consortia on concern that a large grouping would reduce the potential for a rival bid, citing a similar move by General Electric Co. (GE.N) in the sale of its plastics unit.

NOT ABOVE A$15.25?

Other sources familiar with the situation said all the members of the previous bidding consortia were expected to take a look but would not be keen to pay above A$15.25.