Vanda Carson

DESPITE all the tough talk and financial muscle-flexing about his ability to bid simultaneously for retailers on both sides of the Tasman, Woolworths chief Michael Luscombe has yet to apply for approval from the local competition regulator to be involved in the Coles sale.

Speaking yesterday after announcing solid growth in third-quarter revenue, Mr Luscombe confirmed Woolies had had talks with "a wide variety of interested parties" about a possible joint offer for some assets of rival retailer Coles Group. He added the company had lodged a formal "expression of interest" for Coles's assets, a move that takes it one step closer to entering the Coles data room which is expected to be opened to other bidders this week.

Mr Luscombe, who took the top job in October, was also considering making a bid for Warehouse Group, New Zealand's biggest general merchandise retailer, in which it already owns a 10 per cent stake.

Earlier this year he applied to New Zealand's competition regulator for clearance, despite no legal requirement to do so at this stage of the process. A decision is expected later this month.

However, Woolies has yet to approach the Australian Competition and Consumer Commission, which yesterday confirmed it had not received an application for clearance.

Woolworths spokeswoman Claire Buchanan said there was no legal requirement to apply for clearance in Australia either as no formal bid had been made.

Coles put itself on the auction block in February after admitting it was unable to generate ambitious profits promised in the wake of earlier offers by US private equity group Kohlberg Kravis Roberts.

So far only two bidders have officially declared they are in the running for Coles, Perth's Wesfarmers, with its own $19.7 billion bid, and a consortium of six private equity firms led by KKR.

Mr Luscombe was coy about his interest in Coles, and was careful not to stray from his carefully worded script.

"I wouldn't want you to write that something dramatic has happened in the last couple of days," he said, referring to talks between the two retailers.

He declined to say whether KKR or British retailer Tesco were potential bidding partners, and was diplomatic when asked for his reaction to Wesfarmers' complaints that other potential buyers could be handicapped if Woolworths was given a confidential insight into the retailer's books.

"We will work with the ACCC or anyone else, should the process move forward," he said. "We are going down our track, other [bidders] will walk down another track, we make no judgement on whether what they are doing is good or bad or indifferent."

COLES chairman Rick Allert yesterday fired the starting gun for the group's big sell-off, confirming that a second consortium led by Kohlberg Kravis Roberts wants to buy the retailer and is prepared to outbid Wesfarmers' opening offer.

The official start of the bidding war confirmed the entrance into the race of KKR - a move widely predicted.  The six-member KKR-led consortium told Coles it was "confident" of matching or bettering Wesfarmers' $16.47 per share offer, providing it is satisfied with Coles's books. These are to be shown to suitors from as early as today.

The sharemarket, in particular hedge funds, appeared to be confident final offers will come in well over $17, with Coles shares closing yesterday at $17.33, up 36c from Thursday's closing price, and above Wesfarmers' offer.

Tyndall Investment Management fund manager Craig Young said he believed a bidding war was a "possibility", but not a certainty.

"Still, there's a big chance KKR will be the only bidder for the whole lot," he said, supporting market talk that Wesfarmers is only after the Officeworks and Target stores.

The news comes one week after Wesfarmers secured an 11.3 per cent stake in Coles, which owns a suite of supermarkets and petrol stations, as well as Officeworks, Kmart, Target, liquor stores and hotels.  The Perth group has since obtained control of 12.8 per cent of the retailer's shares, beginning with the purchase of 34 million shares from former chairman Solomon Lew.

He stands to make more money if the bid increases, thanks to an escalator clause in his contract with Wesfarmers, according to documents released to the stock exchange. For example, if the company is sold to a rival for $17.47 a share, Mr Lew will take home a further $17 million on top of the $659 million he has already made.

The retailer put itself on the auction block in February after admitting it was unable to generate ambitious profits promised in the wake of earlier offers by KKR.

Sources close to KKR yesterday said they were still nutting out a confidentiality deal with Coles which restricts it from making approaches to other potential bidders or buying shares.

The confidentiality agreement is a condition of entering the virtual data room.  The due diligence process is expected to take between four and six weeks, and will likely be followed by offers.  The Coles board will ultimately recommend one of the offers to shareholders, who will vote on the outcome.

Wesfarmers yesterday emphasised its offer was preferable because it was the only bidder able to offer Coles shareholders scrip in its company, which meant they could continue to profit from growth in the supermarkets, liquor, petrol and general merchandise stores.

It also appealed to investors' patriotism, saying its ownership would "ensure that Coles remains in Australian hands" and crowed that it could do a deal faster than any competitor.

"[Wesfarmers' offer] is not subject to regulatory impediments, ensures that Coles remains in Australian hands and can be implemented with minimum delay to avoid further damaging ownership uncertainty impacting on the Coles's businesses," chairman Richard Goyder said in a statement.

WESFARMERS boss Richard Goyder is aiming to take on Woolworth's newly appointed boss Michael Luscombe for domination of Australia's retail sector as he prepares to launch Australia's biggest ever takeover bid: a $19.6 billion hostile move on Coles Group.

The Coles board will continue negotiations with Wesfarmers today but the Perth company is demanding Coles open its books immediately so it could launch a hostile takeover bid as soon as possible.

Coles was planning to open a "data room" next week so that competing private equity groups - who planned to engage in a tender auction run by Coles - could conduct due diligence.

Wesfarmers and its partners, Pacific Equity Partners, Macquarie Bank and UK private equity group Permira, have built an 11.3 per cent stake in Australia's second largest retailer.

But tensions already have emerged, particularly with the separate deal struck with former Coles chairman Solomon Lew. Mr Lew has pledged to offload his 5.8 per cent stake to the Wesfarmers consortium but only if he has an "escalator clause" which will deliver him the benefits of any higher offers.

Offshore hedge funds have demanded a similar deal and halted the syndicate's plans to snap up 15 per cent of Coles on Monday night.  Under the escalator clause, Mr Lew would be entitled to receive any higher price for half his stake.

But Wesfarmers refused to offer the same deal to hedge funds.

Wesfarmers has offered $16.47, the same price it paid for its stake on Monday night, with a cash or cash and scrip offer, pitched at a 3 per cent premium to the previous closing price and 49 per cent higher than the shares were trading in August last year before the share price rocketed on early takeover speculation.

Meanwhile, the Kohlberg Kravis Roberts consortium was hinting it was considering raising its $15.25 a share offer.

Under the Wesfarmers plan, it will take outright control of Target and Officeworks. But it will take a half share in the company's core operations - the Coles and Bi Lo supermarkets, fuel and convenience stores, bottle shops and Kmart - in partnership with a trio of private equity companies: Permira, Pacific Equity Partners and Macquarie Bank.

Of the private equity groups' half share, Permira will own the largest stake (35 per cent), followed by PEP (10 per cent) then Macquarie with just 5 per cent.

Chief executive Richard Goyder said the speed of the offer would help avoid further decline in earnings at the poorly performing supermarkets by resolving the ownership uncertainty.  "We believe the acquisition of Coles would be a positive step for the shareholders of both companies," Mr Goyder said.

The moves come after sources revealed market leader Woolworths made a rival offer for Solomon Lew's 5.8 per cent stake in the company in an attempt to deal itself in to any break-up of the Coles Group.

If the deal goes ahead, Coles would probably leave its Melbourne heartland and could be based in Perth.  It would also mean Wesfarmers would own three of the nation's biggest retailing stores: Bunnings, Target and Officeworks.

Coles has 3000 supermarkets nationwide, as well as dozens of Kmart stores, Target stores, 119 liquor stores, 83 hotels, petrol stations, about 100 Officeworks stores.

Bunnings has 210 stores and had earnings of $420 million last year.