Australia: Coles Myer back on the block

THE CEO-designate of Australia's largest retailer Woolworths, Michael Luscombe, has made an extraordinary intervention in the battle for competitor Coles Myer. He told a private lunch in Sydney yesterday that a second bid for Coles Myer (cml.ASX:Quote,News) was believed to be "on the way". And Woolies (wow.ASX:Quote,News) would be interested in joining any carve-up.

Mr Luscombe was apparently hosting a lunch for suppliers to and executives of the Big W general merchandise business, Woolies's version of a sort of combined Target-Kmart. He thanked the 40 or so people at the lunch for coming to the conference and invited questions. Not surprisingly he was asked about Coles Myer. In sharp contrast, I'm informed, his response was surprising.

Mr Luscombe reportedly responded they'd just had a board meeting and they'd been told US investment bank JP Morgan was putting together a consortium to bid for Coles Myer at between $16.50 and $17.50. He then went on to say if the company was then broken up, Woolies would have an interest in buying one of the parts.

He did not specify which part. But it's a fair guess that it would be either Target or Officeworks. Apart from anything else they are the two parts of Coles Myer which could most easily be sold relatively quickly. Especially Target, which doesn't need much "tarting up".

They each also perfectly fit a gap in the Woolies retail portfolio. And I've little doubt both Luscombe and his predecessor, current CEO Roger Corbett, would lust after both of them. Whether or not competition tsar Graeme Samuel would be prepared to satisfy either lust -- to let Australia's biggest retailer become even more pervasively dominant just as its only rival was breaking into bits - is an altogether different matter.

Now of course Mr Luscombe's purported belief - or even that of the entire board and management of Woolies - does not a bid to compete with and decisively top the $14.50 already rejected by Coles Myer, make. Nevertheless it dramatically and to say the least, unusually, raises the temperature around Coles Myer, before its do-or-die statement next Thursday.

That was originally intended just to release Coles Myer's 2005-06 profit. But after the "Gang of Nine" private equity group unleashed their "offer", it's now much more about Coles Myer's own "project refresh". As in, a project to refresh the limp five-year strategy statement released by Coles Myer CEO John Fletcher last month.

That "started everything". When the shares dropped below $11, the barbarians pounced. Ultimately leading to the rejection of their "highly conditional proposal" of $14.50 and its disclosure to the market. But at the same time putting a floor under the Coles Myer share price. Yesterday, the shares edged to within a whisker of that $14.50.

Any competing bid of the sort suggested would blow the Coles Myer situation, and indeed the Coles Myer group, apart. First, just the reality of the competition. But secondly, because the price range suggested is right at the edge of possible.

But we also got validation from across the Tasman. Stephen Tindall's $1.6 billion, what might be termed private private equity, bid for The Warehouse Group gave us some interesting numbers. That's 10.2 times The Warehouse's 2006 EBITDA and 12.4 times its EBITA.

Apply those numbers to Coles Myer - we haven't got the final 2006 numbers yet - gives you a bid near, wait for it, $14.50. At $16.60 it would be around 11.6 times EBITDA. At $17.50 a multiple of 12.3 times.

Source