MELBOURNE Australia's Wesfarmers Ltd. (WES.AX) set out plans to overhaul takeover target retailer Coles Group Ltd. CGJ.AX, planning to create three new business divisions and aiming for supermarket sales growth of 3-3.5 percent.
The conglomerate said it would invest A$5 billion ($4.1 billion) in Coles over five years, in line with market expectations, and flagged more cost savings for the retailer.
Valued at around A$18 billion at current market prices, the deal would be Australia's largest takeover.
Wesfarmers said ructions in global credit markets have not affected its funding for the takeover, which includes A$10 billion of medium-term investment-grade bank debt.
For the troubled supermarkets division, Wesfarmers said it targeted same-store sales growth of 3.0-3.5 percent by 2009/10, which would be a gradual improvement from Coles' near-flat sales.
"You can't pull a rabbit out of a hat with these sort of things, they do take time," said FW Holst analyst David Spry.
Wesfarmers shares closed down 1 percent, in line with the broader market , having lost as much as 5.9 percent. Coles lost 2.9 percent to A$13.37.
Perth-based Wesfarmers, which owns the Bunnings hardware store chain, said it planned to fix rather than sell underperforming individual supermarket stores, which have lost market share to rival Woolworths Ltd. (WOW.AX).
"Their growth forecasts are conservative," said White Funds Management investment manager Atul Lele. "It's certainly good from a Woolworths perspective as well, in that they're not looking to irrationally compete."
Coles has about 2,700 stores, including supermarkets and liquor shops, fuel, discount chains Kmart and Target, and the Officeworks business supplies chain.
Wesfarmers said it would consider selling all or part of Kmart, or converting some stores to the Target brand.
Wesfarmers Chief Executive Richard Goyder ruled out selling individual stores or the entire chain to Woolworths, which had lodged a bid for Kmart in June.
"I would rule out something that might have a short-term positive impact ... but that causes a headache some years down the track, which would include selling assets to competitors," Goyder told a media briefing.
That would also close the door to private equity firm TPG TPG.UL, which had expressed interest in Kmart and which last year bought the Myer department store chain from Coles.
Wesfarmers plans to split Coles into three divisions: food, liquor and convenience stores; big-box retailing, including Bunnings and Officeworks; and Target.
It forecast corporate overhead cost savings of A$385 million a year by late 2008/09 for Coles, and supply cost savings of A$540 million a year by 2013.
Wesfarmers shares have dropped 14.5 percent from a record high of A$45.73 on June 29, before the company announced the Coles takeover on July 2, as anxiety grew about its ability to turn around the struggling supermarkets operator.
The decline has pulled down the value of the Coles offer to around A$18.4 billion, or A$15.36 a share, compared with A$21 billion, or A$17.25 a share, when the offer was first unveiled.
Wesfarmers last week offered to improve the terms of its scrip-heavy bid for Coles, giving shareholders the option of a higher cash component.
An independent expert will assess whether the offer price represents fair value. It still needs clearance from the competition regulator and approval by Coles shareholders at a vote on October 25.
Investors have been concerned at who will run Coles, since Wesfarmers' retail experience is through its Bunnings hardware chain, and Goyder said on Thursday he had had "strong interest" from retail executives interested in joining the group.
Separately, Wesfarmers said its net profit in the year to June 30 fell 9.6 percent to A$786.3 million ($644.5 million), in line with forecasts, hit by lower coal production and prices.
Profits at its coal division profit fell 41.5 percent, while Bunnings' earnings before one-offs rose 16.1 percent.
(Additional reporting by Jane Williams)