Reuters

The European Union's highest court struck down a German law that shielded Volkswagen from takeover, paving the way for Porsche to take majority control of Europe's biggest carmaker.  The ruling is a major boost for the European Commission in its crackdown on so-called golden shares, or strategic stakes that give governments special influence over listed companies.

"The Court confirmed that public authorities should not have special rights in private companies. Special rights have become an ever more endangered species on their way to extinction," Commission spokesman Oliver Drewes told a briefing in Brussels.

The law's demise could also end decades of cosy ties between management and labour at VW in a system called co-determination that gives workers a major say in how the company is run.

The court ruled as expected that the Volkswagen Law broke EU rules on the free flow of capital because it capped voting rights at 20 per cent and let VW's home state of Lower Saxony veto strategic decisions with just 20 per cent of the votes.

Porsche welcomed the ruling that lets the maker of 911 sports cars exercise all of its VW voting rights via its nearly 31 per cent stake in Volkswagen ordinary shares.  Porsche has said it has secured enough options to let it "significantly" raise its holding in VW but has declined to say whether this meant it could already gain majority control.  "There is no decision on how we will proceed. We will take the decision to the supervisory board and this will be a decision for the supervisory board," Porsche spokesman Frank Gaube said in Luxembourg.

The next meeting of the sports car maker's supervisory board is set for November 12, he said, adding he could not say whether the VW issue would be on the agenda.  One source familiar with the matter said it was unlikely Porsche would increase its stake before the end of this year. 

Analysts suspect it may await the outcome of Lower Saxony state elections on January 27 before making its next move.  This put an immediate dampener on shares of Volkswagen, which fell 3.3 per cent to 174.52 euros by 1224 GMT after briefly rising as much as 2.5 per cent following the court's decision.  Shares in Porsche were up 4.8 per cent.

VW said it would examine the ruling's impact on its statutes, while the powerful IG Metall engineering workers union called on the Berlin government to ensure labour representatives on VW's board could still block plant closures or transfers.  "The verdict puts the interests of capital markets above those of employees and Lower Saxony," IG Metall local chief Hartmut Meine said.

The 1960 VW law stipulated that Germany and Lower Saxony were each entitled to appoint two members to VW's supervisory board as long as they owned shares.  The German federal government is no longer a VW stockholder, but Lower Saxony is its second-biggest investor and said it intends to keep its VW stake of 20.1 per cent.

Porsche said it would be in favour of Lower Saxony's two board representatives remaining in their positions.  Both Berlin and Lower Saxony said they accepted the court's decision. The German justice ministry said it would immediately start the process of amending the legislation.  The EU executive is using the court to stop member states using strategic stakes in companies to thwart takeovers.

In June it gave Portugal a final warning to scrap special rights the country holds in two energy companies – Energias de Portugal and GALP Energia.  It also started legal action against Poland over a law giving the state special rights in 15 companies.  And it warned Romania over its share in the country's biggest oil and gas firm, Petrom, a unit of Austria's OMV.

Australia's second-largest retailer, Coles Group, agreed to a A$22 billion ($NZ24.5 billion) bid, including debt, from conglomerate Wesfarmers, in the country's biggest takeover.  The deal, if approved by shareholders, will end a protracted auction process since Coles first put itself up for sale in February after poor performance. Last year, it rejected two offers from private equity firm Kohlberg Kravis Roberts.

Wesfarmers, which owns Australia's largest hardware chain, Bunnings, will pay A$4 in cash and 0.2843 Wesfarmers shares for each Coles share, which it said valued each Coles share at A$17.25.  That represents a premium of 7 per cent to Friday's closing price for Coles.

"I'm surprised that Coles is able to extract A$17.25 given that it appeared that Wesfarmers were the only people at the table bidding for the assets," said Richard Herring, director at Burrell & Co. "Let's hope that Wesfarmers hasn't underestimated the task ahead of them," he said.

Wesfarmers, which snared 12.8 per cent of Coles in a share raid in April, said it expected to complete the deal in October.  Managing director of the Perth-based conglomerate, Richard Goyder, told a media briefing it planned to hold on to all the Coles units.

Wesfarmers had to bid solo for the troubled supermarket chain, after its private equity partners, Permira and Pacific Equity Partners(PEP) withdrew over the weekend.  The private equity firms were unable to make a deal stack up after a sudden jump in the cost of credit in US markets over the past week, a source familiar with the situation said.  Wesfarmers was left as the only bidder for the entire Coles group after a rival private equity bidding group led by TPG pulled out of the running last Thursday, also citing the rising cost of credit in the US.

Coles and Wesfarmers shares are suspended from trading and expected to resume today.  Wesfarmers was aided in its cash and scrip offer by the 21.4 per cent surge in its share price since late May, as its prospects for winning Coles kept improving. Wesfarmers shares closed on Friday at A$45.73, a record high.

The Wesfarmers' offer values Coles at 23 times forecast 2008 earnings, higher than its more successful competitor Woolworths at 21.3 times and UK's Tesco Plc at 17 times.  Coles said the offer has no conditions attached related to financing or competition regulator clearance.  It noted the takeover price was a 19 per cent premium over its price on February 22, before the sale process was announced.

Wesfarmers had originally planned to take a 50:50 stake in Coles' core supermarkets business with its private equity partners, and own 100 per cent of the general merchandise units, but is now bidding for the entire group on its own.  After rising to a record A$17.89 in May, Coles shares dived as members of the private equity consortium pulled out, and on Friday closed at A$16.12.

Coles has 2900 supermarkets, liquor stores, K-mart and Target stores, and office supplies stores Officeworks.

A source close to the situation said earlier today that PEP was still in talks with Wesfarmers about a management role, which is seen as critical by analysts to help turn around Coles' troubled core supermarkets business.  Steven Cain, a former executive at Coles and UK supermarket chain Asda, is a director at PEP and has been touted as having the experience necessary to help Coles catch up with larger rival Woolworths Ltd.

Without equity partners, however, Wesfarmers is likely to take on a larger amount of debt and may make a rights issue to fund the takeover, which will double the size of the company.  "It's a very big bite for Wesfarmers without its partners, no doubt about it. But if they can retain (retail executives) Steven Cain and Archie Norman to turn it around, it should all work out," said an analyst at an investment bank.  Norman, a Briton, is a former head of Asda, and has a consulting role with the Wesfarmers consortium.

The joint announcement appears to leave no room for rival Woolworths, which lodged its own bid for some of Coles' units at the weekend.

Coles had set a Saturday deadline for bids, four months after putting itself up for sale in February because of poor performance in its core food and liquor business.  Coles is being advised by Deutsche Bank and Carnegie Wylie, while Wesfarmers is being advised by Gresham Partners and Macquarie Bank.

MELBOURNE - Coles Group, Australia's second-largest supermarket retailer, yesterday set a June 25 date for final bidding for the company as it reported a tiny 0.6 per cent rise in third-quarter sales.

Coles, which put itself up for sale in February, also said conglomerate Wesfarmers would start checking its books starting May 25. That is the day the two-week exclusive period of due diligence of a private-equity consortium led by Kohlberg Kravis Roberts expires.

Wesfarmers last month offered A$19.7 billion ($22.2 billion) for the retailer. A potential third bidder, Britain's Tesco, decided last week not to pursue an offer.

Coles reported sales from continuing operations in the 13 weeks to April 29 rose to A$8.4 billion. By comparison, main rival Woolworths reported an 8.8 per cent increase in the quarter to A$10.56 billion.

"It's a pretty dire retail result," said ABN Amro Asset Management analyst Matthew Hoult.  "With inflation running at 3 per cent, the implication is that volume comparisons are seriously negative, which in a retail environment is the last thing you want to see happening," he said.

ABN Amro analysts had forecast like-for-like sales growth of 2.1 per cent, while JPMorgan had forecast a 2.2 per cent decline.  Coles said comparable sales in its core food and liquor business rose 0.8 per cent, which it said was in line with its expectations.

The retailer said cost-saving initiatives and moves to improve the fresh food offering were having a positive impact, but were introduced too late in the quarter to be reflected in the result. Coles has struggled since the failed conversion of its discount Bi-Lo supermarkets to the Coles brand.

It left its forecast of steady net profit for the year unchanged.

British retailer Tesco has decided not to pursue a bid for Australian retailer Coles Group, a source said yesterday.

"They viewed it as a massive turnaround being required and a huge resource commitment," the source said, referring to Coles, which has a market capitalisation of A$21 billion ($24 billion) and has been losing market share to rival Woolworths.

The withdrawal of interest from Britain’s biggest supermarket group leaves conglomerate Wesfarmers and a consortium including private equity giant Kohlberg Kravis Roberts to battle it out for Coles.

Tesco appointed Merrill Lynch to look into a possible Coles offer, sources confirmed last week, but had decided in recent days it was not a sound move.  Sources have also pointed out Tesco usually does not buy its way into a mature market but prefers to set up on its own in emerging markets.

The Australian Financial Review reported yesterday that Tesco’s interest was believed to be waning but negotiations between Wesfarmers and Coles were in the final stages for a start to due diligence.

Wesfarmers emerged as a surprise contender for Coles last month, offering A$19.7 billion for the retailer.  Other local newspaper reports said KKR was close to finalising a joint venture with Woolworths to bid for Coles.

Coles put itself up for sale in February after rejecting an A$18 billion private equity bid last year.

MELBOURNE - Australia's Woolworths is in talks with a number of potential partners about a bid for Coles Group, a source said, amid reports it was leaning towards UK retailer Tesco rather than a KKR-led consortium.

The Australian newspaper reported yesterday that Woolworths was talking to Britain's largest retailer Tesco as part of its ambitions to secure parts of the Coles group, which has put itself up for sale.

The source declined to rule out Tesco as one of the interested parties, which has been the subject of media speculation. "Discussions are progressing with a number of parties" about potentially linking up for a bid for Coles, the source said.

Woolworths did not have a favourite potential partner as yet but saw itself as key to enhancing another bid for Coles, the source said.

Any Woolworths bid would compete with a A$19.7 billion ($22 billion) takeover offer from conglomerate Wesfarmers and create a third bidding force in addition to the KKR group, which may still bid without partnering a listed company.

"Things are still very much alive for KKR," a second source said yesterday when asked about a KKR bid for Coles.

The KKR consortium was still talking to Woolworths but was also exploring the option of making a higher cash bid or setting up a listed vehicle which would give Coles shareholders a scrip option, the source said.

Woolworths chief executive Michael Luscombe said last week the retailer was having talks with "a variety" of parties, but at present was planning to examine Coles' books by itself.

Woolworths is interested in acquiring the Officeworks business supplies chain and discount clothing retailer Target, but it would be prevented from acquiring Coles' core supermarkets and liquor business because of competition concerns.

There has been speculation that Woolworths could team up with the KKR consortium of six private equity firms to bid for Coles. The KKR consortium, which includes Bain, CVC, Blackstone, Carlyle and TPG, has not made a firm bid but said it expected to match or top the Wesfarmers offer.

Analysts have said Wesfarmers has an advantage with shareholders since the scrip portion of its bid offers capital gains tax relief, which a cash-only bid cannot match.

A foreign retailer such as Tesco, or a private equity group such as KKR, can only offer cash unless it teams up with a listed Australian company that can offer its shares as part of a bid.

Woolworths, Australia's largest retailer, said yesterday it has talked with other parties about a possible joint offer for some assets of rival retailer Coles Group.

Woolworths told analysts it has lodged an expression of interest for Coles' general merchandise assets, the first time it has confirmed its interest.

So far, Coles has attracted an A$19.7 billion ($22.5 billion) takeover offer from conglomerate Wesfarmers, which faces a potential bidding war from a consortium of private-equity firms led by Kohlberg Kravis Roberts .

Woolworths chief executive Michael Luscombe told Reuters the expression of interest was on Woolworths' own behalf "at this stage". However, it could join with another group in the future.

"We have had and continue to have discussions with a variety of interested parties, but that's the extent of progress so far," Luscombe said.

Some market watchers have speculated that Woolworths could team up with KKR, although it would be prevented from acquiring Coles' core food and liquor business because of competition concerns.

Analysts have said Wesfarmers has a distinct advantage with shareholders since the scrip portion of its bid offers capital gains tax relief, which a cash-only bid by KKR could not match.

A joint bid between KKR and a listed Australian company such as Woolworths would be critical in helping overcome that disadvantage.

Luscombe said the company would advise shareholders "at the appropriate time" if it decided to conduct due diligence on Coles assets. He declined to specify whether Woolworths was interested in Coles' discount retailers Kmart and Target, or business supplies chain Officeworks, and saw no competition concerns.

Luscombe said Woolworths, which was also interested in New Zealand's Warehouse Group, could make more than one acquisition.

"We have room in our balance sheet to make the acquisitions that we would potentially like to make," he said.

Earlier, Woolworths reported an 8.8 per cent increase in third-quarter sales as it continued to gain market share in food and liquor at the expense of Coles.

Citigroup analysts expect the trend to continue, with much of the sales losses at Coles due to disgruntled shoppers shifting to the competition after the conversion of Bi-Lo stores to the Coles brand.

"It's a fair assumption. I'm sure we're getting some of that business," Luscombe said.

Citigroup estimates Coles has forgone A$350 million in sales from Bi-Lo, and that Woolworths has picked up about 45 per cent of those sales.

Woolworths said its sales for the 13 weeks to April 1 rose to A$10.56 billion from A$9.71 billion a year earlier, and it maintained its forecast for full-year sales growth of between 8 per cent and 12 per cent.

Woolworths' sales in the core Australian food and liquor business rose 8.3 per cent and comparable store sales were up 6.6 per cent.

In general merchandise, which includes the Big W discount chain, total sales rose 16.5 per cent. Comparable Big W sales, after adjusting for the timing of Easter, were up 6 per cent, far stronger than the recent performance by main rival Kmart.

Woolworths said its sales from continuing operations for the nine-month period were up 13.5 per cent from a year earlier.

China has vowed to speed up banking system reform and spur domestic demand, making it a priority this year to cut its trade surplus with the rest of the world, the IMF's steering committee said today.

"Comprehensive steps will be taken to expand domestic demand, accelerate structural adjustment and achieve a rough external balance over time," the International Monetary Fund group said in a statement issued after its semi-annual spring meeting.

The report on plans by the five -- China, the euro zone, Japan, Saudi Arabia and the United States -- noted that China had introduced greater flexibility in the renminbi's exchange rate and that China's "foreign exchange market infrastructure has been significantly improved."

"Exchange rate flexibility will gradually increase, with attention paid to the value of a basket of currencies," said the report.

China also planned to boost household incomes and rural consumption as part of efforts to stimulate demand and trim external balances. Beijing would also change export tax rebate policies in an effort to reduce its trade surplus, it said.

A communique by the steering committee said it agreed that "resolving imbalances in a manner compatible with sustained global growth is a shared responsibility."

The IMF said the plans by the five parties represented "further progress in the implementation" of the Fund's strategy on reducing imbalances.

A bidding war looms for Coles Group after a Kohlberg Kravis Roberts-led consortium told the retailer it may top a A$19.7 billion ($22.6 billion) bid by Wesfarmers, pushing Coles shares to a record high.

Coles, Australia's second-largest retailer, has already attracted the country's biggest takeover offer from Wesfarmers, a home improvement-to-energy conglomerate, at A$16.47 a share. Last year, Coles rejected a KKR-led offer of A$15.25 a share.

"It looks like it could turn into a bidding war. KKR have obviously done a lot of work on Coles," said Constellation Capital Management analyst Richard Norris, a Coles shareholder.

Coles chairman Rick Allert said yesterday that KKR was confident it could equal or beat the Wesfarmers bid price for Coles, which put itself up for sale in February. Coles shares rose 2.7 per cent to A$17.42, well above the Wesfarmers' offer, in an overall market up 1.1 per cent.

Constellation's Norris said Wesfarmers could "just as happily" take a profit on its Coles stake if KKR comes up with a higher offer.

Potential bidders will get a look at Coles' books this week, in a process that has been accelerated by Wesfarmers' surprise offer last week. 

KKR, with other private-equity firms Bain, CVC, Blackstone Group, Carlyle Group and TPG, will be looking for more detail on what Coles is worth.  Coles did not engage in detailed discussions last year with KKR, which made two failed bids.  Coles urged shareholders on Monday not to sell until the board had considered all alternative proposals.

Perth-based Wesfarmers has won the backing of privately-owned Hedley Group, taking its voting control in Coles to 12.8 per cent.

The Myer department store chain, which was sold by Coles last year, turned in an 80 per cent profit increase last month under new private equity owners, raising hopes for a turnaround at Coles, which has lost market share to larger rival Woolworths.

A spokesman for Wesfarmers said the company, which owns the Bunnings hardware chain, would take out advertisements in Australian newspapers this week to reach Coles' 350,000 shareholders, most of whom own less than 10,000 shares.

Institutional investors unhappy with a A$368 million ($423 million) takeover offer for Australian sporting goods and clothing retailer Rebel Sport are edging closer to blocking the deal.

Two of the three institutions that have said they think the offer from private equity firm Archer Capital is too low have increased their stake.

The three combined hold 24.85 per cent of Rebel, and the deal will require 75 per cent approval at a shareholders meeting next Thursday.

If the takeover falls through, it would be the second private equity deal in Australia to do so within weeks, as institutional shareholders increasingly resist deals they consider opportunistic and worry about reinvesting funds into expensive markets.

Earlier this month key shareholders in travel retailer Flight Centre rejected a A$1.6 billion private-equity-backed management buyout.

Perpetual Investments said yesterday it had increased its stake to 10.7 per cent from 9.6 per cent.

Perpetual told Reuters last month it was planning to vote against the deal, but was not available yesterday to comment.

Another of the opponents, Paradice Investments, on Thursday increased its stake to 7.7 per cent from 6.6 per cent. Paradice was also not available to comment.

Invesco Asset Management holds 6.5 per cent of Rebel and is also likely to vote against the deal.

"They [the institutions] are trying to block the bid. They think it's worth more than that, a combined Amart and Rebel business would be attractive and would have a very large sports apparel business," said a retail sector analyst who asked not to be identified.

Rebel has about 60 stores and Archer managed funds already majority own the Queensland-based Amart All Sports chain, with over 70 stores.

Rebel's largest shareholder, Harvey Norman, which holds about 52 per cent, is in favour of the proposal and has said it would be foolish to block the deal.