18/09/2007 - 22:00

Sweeter offer keeps takeover on track

18/09/2007 - 22:00

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An innovative takeover sweetener for Coles Group Ltd shareholders became all the more important last week when an independent expert’s report revealed Wesfarmers Ltd would effectively secure the retailer on the cheap.

Sweeter offer keeps takeover on track

An innovative takeover sweetener for Coles Group Ltd shareholders became all the more important last week when an independent expert’s report revealed Wesfarmers Ltd would effectively secure the retailer on the cheap.

By sweetening its bid using a rare structure in an Australian takeover – price protected shares – the conglomerate has managed to stay firmly on target to buy Coles.

Under the revised deal, Coles shareholders receive 0.14215 Wesfarmers ordinary shares and 0.14215 price-protected shares plus $4 cash for every Coles share they own.

The new price-protected shares will be traded on the Australian Securities Exchange and attract the same fully franked dividends as Wesfarmers’ ordinary shares.

The advantage for Coles’ shareholders is that they will receive an additional 0.25 ordinary shares if shares in Wesfarmers trade lower than $45 in four years’ time. If the shares perform better than expected within the four-year period, they will simply convert into ordinary shares.

It is an innovative structure that came from Coles’ adviser Deutsche Bank, Wesfarmers chief executive officer Richard Goyder said.

He told WA Business News the revised offer drew criticism from some analysts at the time because many thought the conglomerate should hold firm.

But he believes the structure has relieved pressure on Coles to search for alternatives in the wake of Grant Samuel & Associates’ independent report.

“It would have put a heck of a lot of pressure on Coles to go a different way, so I think we have done the right thing by putting it [price-protected shares] in place,” Mr Goyder said.

Wesfarmers was forced to offer the insurance over its shares after turbulent global markets punished its share price and, along with it, the value of its original bid.

“[Price-protected shares] was a fairly useful idea because sharemarkets will become increasingly volatile,” Mr Goyder said.

Further detail on the structure of the offer will be released with the scheme booklet, due to be sent to shareholders next month.

It is understood Wesfarmers will be protected in the event of a market meltdown.

Analysts remain divided on whether the Coles acquisition will pay off for Wesfarmers, however.

In a research note issued by Merrill Lynch, its analysts say that, if Wesfarmers buys Coles, it will suffer heavily in the next three to five years.

But Bell Potter Securities believes Wesfarmers is traditionally conservative and has highlighted a comment made by investment bank UBS in a report on UK retailer Asda, in 1994.

Asda was two years into a turnaround led by Archie Norman.

“Being sellers was very wrong in 1992,” the UBS report said. “We were lulled into looking at problems rather than the potential by talking to a management team anxious to get expectations as low as possible.”

Mr Goyder won’t be drawn into committing to a timeframe on a turnaround, other than to say it will “take some time”.

Mr Goyder said investors that avoided Wesfarmers because of Coles were taking a bet that Wesfarmers “could not do things better or faster or do other things in our other businesses that will create shareholder value”.

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