Coles Myer shares slip after board rejects private equity takeover bid

Shares of Coles Myer has traded lower after the second largest Australian retailer rejected an indicative A$17.4 billion bid put forward by a private equity syndicate.

Coles Myer’s board has rejected an indicative A$14.50 ($11.07; €8.66) a share bid a syndicate of private equity firms have shown on grounds that the proposed offer “substantially undervalues the company,” the second largest Australian retailer said in a statement to the exchange.

The proposed offer price would give Coles Myer a market capitalisation of A$17.4 billion ($13.34 billion; €10.4 billion), which represents a 6.5 percent premium over the company’s share value at A$13.62 at the close of trading today.

Coles Myer share price

Coles Myer shares opened lower today after the company’s board rejected the takeover offer yesterday. The shares closed at A$13.71 yesterday, down from a high of A$13.99 recorded on 31 August. Today, the shares opened at A$13.60, and traded at an intra-day range of A$13.46-13.81.

“Share prices will fall if shareholders were certain the offer is going to walk. The fact that the share is stuck at around A$13.65 would suggest the market doesn’t really know,” said an analyst in Sydney who did not wished to be named.

The same analyst said the A$14.50 a share offer was “compelling” even if the board of Coles Myer had a successful turnaround strategy, and he does not see the offer being raised beyond A$15 a share.

Coles Myer has also, for the first time, identified the parties involved in the takeover offer. They are: Bain Capital, Blackstone, The Carlyle Group, CVC Asia Pacific, Macquarie Bank, Merrill Lynch, TPG-Newbridge and Pacific Equity Partners. Merrill Lynch has denied its involvement in a Reuters report.

In a letter addressed to shareholders, Coles Myer explained that aside from price, the proposal was also unacceptable because its “conditions mean there is no certainty on any aspect of it or any obligation on the part of the consortium to proceed.”

“The consortium was effectively seeking a free option over the company.”

Coles Myer is scheduled to deliver a financial outlook for 2007 and 2008 as well as details of a new strategic direction for the company on 21 September.

Scott Marshall, head of industrial research at Sydney-based SHAW Stockbroking said: “The ball is in the court of the syndicate, which will likely revised its bid after 21 September, and this will in turn pressure the board to allow for due diligence to begin.”

“It is the role of the board to get the highest bid possible. The private equity group can probably afford to raise their offer. From a strategic standpoint, they are not likely to show their best offer from the start.”

Marshall also added that “it is a long shot, but a possibility” that Tesco emerges as a rival bidder, for Coles Myer models itself after the retail giant.

“If Tesco had any interest to buy Coles, they would strike now rather buying from private equity owners later at a higher price.”