Coles On Front Foot To Sell Recovery Plan

The Age

Monday September 18, 2006

JAMIE FREED and JEFF TURNBULL

COLES Myer chief executive John Fletcher has responded to the tidal waves of takeover speculation that have washed over the company in recent weeks with a nationwide advertising campaign that highlights the performance of management and staff in achieving the retail giant's strategic goals.

Full-page ads appear in newspapers this morning in the run-up to Thursday's all-important annual results briefing. They thank staff for their efforts, and claim Coles Myer has produced a "great result" for shareholders in the past five years.

Mr Fletcher is expected to unveil a result that exceeds the target net profit of $785 million he set five years ago when he joined the company.

It would be a big improvement on the previous year's profit of $624.5 million.

At least two private equity consortiums are believed to still be circling Coles after its board knocked back an indicative offer of $14.50 a share, or $17.3 billion, from the Kravis Kohlberg Roberts-led group this month.

The fact that private equity investors are interested in Coles at prices above those of recent trading implies they think they can do better than existing management. Highlighting the company's performance appears at least in part to be aimed at redressing the perception in the market that this is the case.

The potential bidders are not likely to make a move until after Thursday's results briefing.

But with the result unlikely to surprise, the market will be focused on the group's outlook and how it plans to grow faster than it would in private hands.

Some analysts say it won't matter what Mr Fletcher unveils because it's only a matter of time before Coles Myer falls into other, possibly foreign, hands.

Analysts believe the $14.50-a-share gambit will be negotiated higher and that KKR and its allies are just waiting for the breakdown of the year's results to get a better idea of the business.

The Coles Myer board has kept its books closed, denying them a chance for due diligence.

The market was underwhelmed by an $850 million transformation strategy Mr Fletcher outlined in July that proposed putting well-known brands such as Bi-Lo, Kmart and Liquorland under a single Coles banner.

At that briefing, Mr Fletcher warned that 2006-07 would be a year of transition, with growth in underlying earnings and earnings per share. But headline earnings would be affected by the cost of the transformation program and strategic initiatives.

Some analysts believe that change in direction flushed out private equity firms that don't want to see the valuable Kmart and Liquorland brands - which could be spun off by a new owner - disappear.

Tyndall Investment Management retail analyst Craig Young said the Coles Myer board would need to justify why it knocked back the $14.50 offer, which was substantially above the market price at the time.

The Coles Myer turnaround plan is aimed at snatching sales and market share from Woolworths in the $70 billion-a-year grocery market.

Coles Myer will spend $910 million on rebranding shops and improving service to win sales, but at a cost to net profit.

It is expected to save $425 million a year when the restructure is complete, but earnings will come under pressure this financial year.