12/06/2007 - 22:00

What is it about Coles deal?

12/06/2007 - 22:00

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Expect to read a lot more in the coming weeks about the search for value in an economy performing at its peak. The reason for this is simple; everything is going so well that it is hard to see what will provide the next lift – and it’s the lift we like rather than steady-state performance.

Nationally, the economy is going so well that interest rate rises are back on the agenda to snuff out excess, inflation-creating growth. Unemployment is at its lowest in 35 years, the property market boom is over, but prices are creeping up, the dollar is at a 17-year high, and the stock market pops up for an occasional peak into record territory.

But a series of recent comments by people far smarter than Briefcase caused these musings about what’s next and where’s the future value.

They also posed a couple of questions that might be keeping Wesfarmers boss, Richard Goyder, awake at night as he contemplates what it’s like to be (almost) the last man standing in what was once a bidding duel for Coles. But more about the emerging Wesfarmers-Coles crisis later.

In the meantime, there is the evidence piling up that the good times are due for a pause, not a slump, just a pause in growth because we are reaching capacity limits across the economy.

First cab off the Briefcase rank contains Don Stammer, a highly regarded economist who wrote recently about how we’re living in a “golden age”.

Now that’s a worry.

When a specialist in what used to be called the dismal science says things are golden (with riders, of course) there’s a chance he has his tongue stuck as firmly in his cheek as Donald Horne did when he referred to Australia as the Lucky Country.

Then we had the chap who writes the Chanticleer column in the Australian Financial Review telling everyone that BHP Billiton remains a good buy at its current price because it is cheap on future price-earnings estimates. Journalists giving share tips is in the same category as cab drivers and bell hops which, when translated, means take cover.

What worries Briefcase is threefold. First, central banks don’t like hot economies, they spray higher interest rates on them to cool them down. Second, no-one likes to buy anything when they suspect they’re paying top dollar and there’s not a lot of future growth to wash away the problem of paying too much. And thirdly, just for dear old Dr Don, there’s what he used to call the x-factor – the thing that goes wrong when we least expect it.

Briefcase is not going to indulge in a guessing game of what might go wrong, that defeats the purpose of an x-factor. If we knew what it was it wouldn’t be called x.

However, potential party pooping events include: a Chinese stock market meltdown spreading to the wider economy; a realisation in China that the dash for growth is rapidly destroying its environment; rising stockpiles of commodities, which will signal the work of Adam Smith’s invisible hand of supply finally rising to meet demand; and exposure of the private equity boom as the farce it really is when people who paid too much for a tired, old asset, realise this is exactly what they’ve done and there’s no growth left once the cost-cutting is done.

Which all led Briefcase to this week’s deep thought about future value, and the first example is Wesfarmers/Coles.

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Until three weeks ago, the bidding for Coles was attracting a full field of usual suspects. Wesfarmers had the lead, having snapped up a 12.8 per cent stake at $16.47 a share, and was offering latecomers to its raid $17.25.

Then came the data room, and this question. What did the private equity funds, CVC Asia Pacific and Kohlberg Kravis Roberts, see in the Coles data that caused them to run a mile?

More importantly, has Wesfarmers seen the same thing, and if not, why not?

The chatter in the market is that CVC and KKR saw deep troubles in the Coles information technology system. Cutting through the IT jargon, they saw a business that had not invested enough in new technology and was trying to manage its stock (of which there is an awful lot) by hand.

Arch rival Woolworths, and most other well-organised retailers, switched to automated stock management systems years ago. Coles, however, is having computer system problems and, presumably, losing market share to retailers able to keep their shelves fully stocked all the time.

Now comes Mr Goyder’s problem. He has already splashed out a billion dollars, or so, for a strategic Coles stake and is now watching people as smart as he is (if not smarter) walk away from the data room shaking their heads.

He is also saying that he is not obliged to offer the $17.25 if/when a full bid is made because no-one accepted that price, a hint that enthusiasm for Coles might be waning in the Wesfarmers camp.

To be kind, perhaps the wise men from overseas are being frightened off by Wesfarmers’ head start with its 12.8 per cent stake.

Whatever the reason for KKR and CVC withdrawing, the problem for Mr Goyder is what happens should a bidding duel not evolve, and he’s the last man standing with a billion dollars stuck in a non-performing business, or one that needs a few more billion to be fixed.

Those questions will be keeping Mr Goyder awake at night because he’s the man who wanted a big deal to show that he wears the same sized shoes as his predecessor, Michael Chaney.

They will also be keeping his partners in the Coles deal awake, because the grand plan is for Wesfarmers to keep OfficeWorks, and other specialist parts of Coles, flicking the food retailing operation to someone else – and it’s a fair bet that the someone else is now looking very closely at what KKR and CVC saw.

•••

On seeing things that others miss, here’s a Briefcase puzzle. If Adrian MacKenzie, the whiz kid who runs CVC, can see something wrong at Coles, why can’t he see the same picture at PBL Media?

Interesting isn’t it. James Packer can obviously see that PBL has enjoyed its best days and it’s time for a new owner – hence, he’s selling.

Mr MacKenzie, however, apparently has a different view than Mr Packer, and he reckons more juice can be squeezed out of an old lemon – and certainly more than can be squeezed out of Coles.

This leads casual observers like Briefcase wondering whether the hunt for value in a stretched market is all becoming a little desperate, as the young guns seek to repeat the success of those who came before them, only to find that the peak really is the peak and to get to the next peak means crossing a valley.

•••

“I am a friend of the working man, and I would rather be his friend than be one.” Clarence Darrow

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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