Coles Myer

Wesfarmers has won board support for its record A$18.2 billion ($21.6 billion) cash and stock bid for Coles Group, Australia's second-biggest retailer, after promising to top-up the offer if its share price doesn't rebound.

The takeover was in danger of failing after Wesfarmers' stock plunged as much as 19 per cent from a record A$45.73 the day the deal was announced, wiping A$2.5 billion from the value of the offer. Wesfarmers yesterday pledged to give Coles investors more stock if its shares are trading at less than A$45 in four years' time.

Wesfarmers shares, which accounts for three-quarters of the value of the bid, have slumped on concern the Perth-based company is paying too much for Coles, whose profit growth has stalled. Rather than increase the offer now, Wesfarmers' chief executive officer Richard Goyder is betting he can revive Coles' fortunes and boost his share price. "This modification of our offer reflects our confidence in the value of the transaction to shareholders of both companies," Goyder said yesterday.

Coles shares rose A68c, or 4.8 per cent, to A$14.92 by early afternoon in Sydney. Wesfarmers shares rose A$1.17, or 3 per cent, to A$39.71. Coles shareholders will get A$4 cash, a 25c dividend and the rest in shares. Half the share component will be ordinary Wesfarmers stock, and half will be so-called price-protected stock. The price-protected shares, which will trade on the Australian Stock Exchange, will pay an annual dividend of at least A$2 each. If Wesfarmers shares are trading below A$45 in four years, owners will get free stock to make up the difference.

The sweetened bid is in the best interests of shareholders, Melbourne-based Coles said, citing a report by Grant Samuel & Associates. Coles did not release the Grant Samuel report, which was commissioned to assess if the bid was "fair and reasonable". The offer from Wesfarmers, whose businesses include mining and insurance, was valued at A$17.25 a share when it was announced July 2, based on the company's record stock price at the time.

The deal was worth A$15.22 a share at Tuesday's prices, which is below a A$15.25 cash offer Coles rejected in October as too low and "substantially" undervaluing the company. Coles owns 3000 stores including supermarkets, Officeworks stationery supply outlets, filling stations and the Target and Kmart discount department stores. Coles shares haven't traded at or above A$17.25 since the bid was made. Wesfarmers was the only bidder for Coles after buyout firms TPG and Kohlberg Kravis Roberts & Co. dropped out of an auction.

Goyder made the bid alone after his buyout partners, Permira Holdings and Pacific Equity Partners, withdrew just before the deadline for bids because of rising borrowing costs. Coles rejected a A$15.25-a-share cash offer from KKR in October as too low, instead backing CEO John Fletcher's promise to boost earnings 35 per cent. In February, the company put itself up for sale after giving up on Fletcher's forecast.

Deutsche Bank and Melbourne-based Lazard Carnegie Wylie are advising Coles. Wesfarmers is being advised by Gresham Partners and Macquarie Bank.

AUSTRALIA'S biggest private transport owner, Linfox, surprised the investment community yesterday with the purchase of Westgate Logistics for an estimated $180 million.

The move triggered speculation that it was part of the Fox family's grand plan to list on the Australian Securities Exchange for at least $1.5 billion.  The market has been waiting for a second force behind Toll Holdings, and analysts say Linfox is conscious of this.  It is not the first time Linfox has listed on the ASX. It listed in 1987, but that lasted less than two years before the family bought back the company.  Linfox is the second biggest transport company in Australia and has operations in 11 countries.

To fund its expansion -- especially projects in other parts of the Fox family empire such as Avalon and Essendon Airports -- it will need large amounts of capital.  Pricing multiples in the transport industry have never been so high. Transport companies are selling for 15 to 20 times earnings.

As a private company, Linfox does not release profit figures, but it says the latest acquisition will bump up its turnover from $1.8 billion to $2 billion.  This is still a far cry from transport industry leader Toll Holdings, which is forecast to report annual revenue in 2007 of close to $10 billion, and net profit of almost $500 million.  Linfox's purchase of Sam Tarascio's Westgate business follows two other acquisitions in the past year, including Bill Gibbons' freight forwarder FCL Freight last August for $170 million and Provincial Freightlines in May this year.

Apart from his transport interests, Mr Tarascio is one of Melbourne's most high-profile builder-developers, with a current construction work book of more than $700 million. His Salta Constructions is one of Australia's largest and most diversified privately owned building groups.  Westgate beefs up its warehouse capabilities and extends its offerings to customers to include more dangerous goods warehousing. It also ensures that it maintains at least one of the big retailers as a key client.  Right now Coles is Linfox's biggest client. Indeed, Linfox founder Lindsay Fox used to sit on the Coles board.  But, with Coles for sale, future contracts may be reviewed. Westgate has a big chunk of the Woolworths transport business.

Linfox has been trying to consolidate its position in the Australian transport market for the past two years, even before Toll Holdings' purchase of Patrick Corporation.  For instance, Lindsay Fox spoke to Chris Corrigan about selling Linfox into Patrick and taking a 20 per cent stake in the merged entity. These plans were derailed when Paul Little's Toll came along and made an offer for Patrick.  He then spoke to Qantas about selling its business.  Sources close to Qantas say the Fox family wanted $1.1 billion, which the airline considered far too much.

Executive chairman Peter Fox's goal is to turn Linfox into a $4 billion to $6 billion operation by 2010, but after the Toll-Patrick merger, the Australian transport landscape changed so dramatically that it forced many of the smaller transport operators to either close or sell out.

Peter Fox said Linfox decided to build up its acquisitions because if it had sat still after the Toll deal it would now be finished. "We have made three acquisitions in the past year to consolidate our position in the industry," he said.  "You can only be number one or two or maybe three in this industry. The others will get squeezed out."  Because of this he expects the third-biggest transport operator, Allan Scott's transport business, to put up the for-sale sign.  "Let's face it, Allan Scott is 84 and there isn't a clear succession in place as far as I can see," he said.  Not surprisingly, Linfox would be first in line to bid for the business. "It's a good business and I can't imagine the ACCC letting Toll buy it.  "Then again, you never know. I didn't expect them to let the Patrick deal go through."

Transport is one of the toughest industries to operate in. It got even tougher when Toll emerged as a fully integrated logistics and transport operator.  It got tougher again with the rising fuel prices, heavy capital expenditure in IT and difficulty in getting staff.  For this reason there will be a lot more consolidation in the next few years.  "As I see it, this place is built on monopolies and duopolies. Companies at the bottom will get squeezed out," he said.  Mr Fox said the company was not looking at listing at the moment. But, he said, "Never say never."

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.

Private equity firm Bain has pulled out of the consortium looking at buying Australia's Coles Group, a source familiar with the matter said.

Coles' advisers have been told Bain was withdrawing, the source said. The source said there was no official word about the position of Blackstone Group, which is also reported to be considering withdrawing from the group.

The size of the group had shrunk to four after Kohlberg Kravis Roberts and CVC pulled out earlier this week, boosting the chances of a rival bid by conglomerate Wesfarmers.

The remaining partners in the private equity consortium are Texas Pacific Group (TPG) and Carlyle Group.

BRW Rich 200 members have offloaded assets valued at more than $15 billion in the past year. So why have they done it and what does it mean for the economy?

Australia's super wealthy have engaged in an unprecedented level of selling over the past 12 months, disposing of more than $15 billion worth of assets. Enormous fortunes have been made, empires have been liquidated overnight, careers have ended and new businesses have been born. The economy is awash with money and private equity firms, property developers and public companies are desperate for new assets to boost returns. BRW Rich 200 members such as James Packer, Kerry Stokes, Solomon Lew and Lang Walker have been presented with deals that were simply too good to refuse.

But there are other reasons behind the great sell-off. Some Rich 200 members are selling up to expedite the transfer of wealth to their children. Some just want to retire. Others are seizing the opportunity to enter new businesses or rebalance their investment portfolios. And in what should be a warning for the business community, the Rich 200 - who are legendary for their ability to spot trends - are also selling up because they see trouble ahead.

Queensland billionaire John Van Lieshout was one of the first Rich 200 members to sell up last year. In May 2006, Van Lieshout offloaded his Super A-Mart furniture business to the private equity group Ironbridge Capital for $500 million. Van Lieshout, a Dutch migrant who arrived in Brisbane as a teenager in the 1960s and owned his first furniture store by the age of 23, built Super A-Mart into a 21-store chain with revenue of more than $350 million. The business was his life's work, but Van Lieshout knew it was time to sell up. "I got 13 times earnings," he says. "I think only once in a lifetime someone comes along and offers you that sort of money."

Greg Will, a PricewaterhouseCoopers partner who looks after a number of moneyed clients, says it is a common refrain among the legion of wealthy sellers. "There are some prices for businesses out there that are just too good to refuse. We've never seen anything like the past 12 to 24 months."

Market observers have been regularly surprised by the magnitude of many deals involving Rich 200 members. Property commentators were stunned when the Besen family received $621 million for a half-share in its Highpoint Shopping Centre and surprised at the $270 million David Burger received for the Mid City Centre building in Sydney. Media industry insiders were amazed when James Packer got $4.5 billion for a half-share in Publishing & Broadcasting Ltd's media business and when Kerry Stokes sold a half-share in his Seven Network for about $4 billion.

The $130 million Solomon Lew received for his Witchery women's fashion chain was more than most pundits predicted. Harvey Norman executive chairman Gerry Harvey thought Archer Capital's offer for the company's stake in Rebel Sport was overly generous, so he sold up and took a $150 million profit. The founder of the RAMS Home Loans business, John Kinghorn, is selling that business. Some analysts value the company at $500 million, but offers are flooding in about the $1 billion mark.

There is an old saying in the business world: when the rich start selling, the market is about to turn down. Will says many of his clients are worried about when Australia's decade-long period of prosperity will end. "It is definitely a concern for them. Waiting for the downturn is really top of mind, because that's how they have made their investment decisions in the past."

The senior vice-president of Merrill Lynch's private wealth services division, Dara Minbashian, agrees. "If you are a seasoned investor you always get worried when there is so much money around." Van Lieshout has clearly made a judgement that the prosperous times the company has enjoyed thanks to the Queensland population boom could be about to end. "The furniture business is wonderful when there is a housing boom. But it is tough when the housing market isn't going so well."

Indeed, Van Lieshout seems genuinely confused about the state of the Australian economy. As part of the Super A-Mart sale, Van Lieshout retained the property Super A-Mart sits on, including its stores, warehouses and offices (the portfolio is believed to be worth about $400 million). He had planned to plough some of the proceeds from his sale into more property investments but he is struggling to pick the market. Prices have skyrocketed in recent months to levels Van Lieshout cannot understand. "There must be so much money in the market that people are willing to pay anything. I don't want to sit on the sidelines for too long because maybe the market will stay like this. It makes me a little bit worried. Whenever I see that it's too good for too long I get concerned. It is certainly different to what I have seen in the past 40 years."

Some property-industry moguls are also wondering whether the market is near its peak. In November 2006, Lang Walker sold a $1.1 billion chunk of his property portfolio to listed property group Mirvac. Included in the deal were shopping centres and a slew of retail, commercial and industrial property. Walker started the sale process in March 2006, but most potential suitors baulked at the price he was asking. In the end, Mirvac picked through the assets individually and Walker sold only those he felt were priced correctly. West Australian investor and Rich 200 member Stan Perron also purchased some of Walker's assets. What makes the sale particularly significant is that it is the second time

Walker has sold the bulk of his portfolio. In 2000, he sold the listed Walker Corporation to Australand for $110 million, brilliantly picking the top of the cycle. Bill Bowness sold the Australian portfolio of his Wilbow Corporation to listed property company FKP for $330 million in September 2006. The sale was partly driven by Bowness's desire to step away from what he calls the "property coalface" and diversify into areas such as mezzanine financing.
Last year, however, he said he was shocked at the prices being paid for property assets. "There is so much money around and there are fund managers who are wanting to do all sorts of things," he says. "There will be tears."

But it is not all bad news. The managing director of Goldman Sachs JBWere's private wealth management division, Paul Heath, believes there are other reasons for the great sell-off besides big prices and concerns about the business cycle.

He points to succession as a big motivator. Australia's wealthy entrepreneurs are ready to hand over to their children, but are finding the next generation unwilling to grab the reins. "The younger generation see other opportunities that don't involve the family business," Heath says. Many rich entrepreneurs are finding that selling their business and splitting the proceeds is a lot easier than trying to persuade unwilling family members to take over.

Goldman Sachs JBWere's head of investment banking, Clark Perkins, says the spate of sell-offs also has much to do with the rapid growth of the private equity industry in the past 12 to 18 months. While wealthy business people have always had the option of selling their business through a public float or a private trade sale, the extremely flexible nature of private equity deals gives them a range of new options. They can sell a business in its entirety, or just sell a chunk. They can arrange to stay in the business for five years or stop work immediately. They might, like Van Lieshout, sell the operating business and keep the property.

"Private equity is providing ... a very real alternative that just didn't exist five years ago," Perkins says. He adds that a private equity deal is also often more palatable for a wealthy entrepreneur than selling out to a bitter rival through a trade sale or facing the public scrutiny a float brings. "Private equity provides a discreet, more confidential exit compared to the public market."

Of course, not every sell-off was motivated by a desire to exit. Perkins says many wealthy business people are also looking to do private equity deals to take their business to the next phase of its life. "They are looking for some fresh thinking and a drive to push the business to grow again." That is exactly why James Packer and Kerry Stokes did private equity deals.

By selling half of their media businesses for $4.5 billion and $4 billion respectively, Packer and Stokes have built massive war chests with which to make other acquisitions and expand their businesses. Packer has already made several acquisitions in the gaming sector while Stokes appears poised to play a big part in the coming shake-up of the Australian media sector.

So will the great sell-off continue? Almost certainly. Private equity funds are swollen with cash and must find ways to spend it if they are to earn the returns their investors demand. This means Rich 200 members will continue to be courted and tempted with huge prices for their businesses.

Rich 200 members are also likely to court private equity firms. Perkins says wealthy individuals and families now understand the private equity model and are more confident it can deliver them a profitable exit or capital to grow.

The sell-off will also continue as the members of the Rich 200 age. Merrill Lynch's Minbashian says: "The next 10 years will see a lot of people selling up simply because they are getting old. These guys are getting to 70 and 80 and 90 and they don't want to run a business any more."

OFFLOADING
Rich 200 members who have sold assets in the past yearBill Bowness Sold the Australian assets of his Wilbow Corporation to FKP Property Group for $330 million in September 2006. He is pessimistic about the Australian property industry and was keen to cash out while the price he could get for his portfolio was sky-high.
David Burger The Sydney property developer sold the Mid City Centre in Sydney for $270 million in May last year.

John Gandel The shopping centre magnate cashed up last year by selling his management stake in the $4.8 billion CFS Retail Property Trust to Commonwealth Bank for about $400 million. In December 2006, Gandel also sold his portfolio of upmarket retirement villages to a consortium of Macquarie Bank and property group FKP for about $105 million.

Tony Haggarty and Chris Ellis In October 2006, Haggarty, Ellis and their fellow directors of Excel Coal agreed to sell the company for $1.8 billion to Peabody Energy, the world's largest private sector coal producer.

Gerry Harvey The veteran retailer sold Harvey Norman's $185 million stake in Rebel Sport to private equity firm Archer Capital. Harvey Norman made $150 million on the deal. John Kinghorn The jewel in John Kinghorn's investment portfolio, RAMS Home Loans, is on the sale block. There have already been a few offers about the $1 billion mark from suitors including National Australia Bank. Private equity firms are ready to pounce, but a float has not been ruled out.

Solomon Lew Veteran retailer Solomon Lew agreed to sell his stake in Coles Myer to Wesfarmers for about $1.14 billion in April this year, severing his ties with the retail giant after a 20-year relationship. In July 2006, Lew sold the Witchery women's fashion chain to private equity firm Gresham Private Equity for $130 million, about $15 million more than its original offer.

James Packer In October 2006, Publishing & Broadcasting Ltd sold 50 per cent of its media business to private equity group CVC Asia Pacific for $4.5 billion. Packer got the best of both worlds: PBL retains control of the new media company and also gets a pile of cash to pay down debt and sink into expanding gaming assets.

Ralph Sarich Ralph Sarich's property company, Cape Bouvard, sold $500 million of assets to United States conglomerate GE in January. The portfolio includes office buildings in Perth, Sydney and Melbourne. While the portfolio was not officially for sale, Sarich says he had many unsolicited approaches during the previous year. GE paid cash for the assets. Peter Scanlon When Peter Scanlon agreed to sell his stake in ports company Patrick Corporation to logistics company Toll Holdings, the takeover battle for Patrick was effectively over. Scanlon took
$405 million worth of cash and shares from the deal.

Kevin Seymour He put a $250 million portfolio of properties on the market in early 2006 and sold an office building in Brisbane in February for $28 million. He is good at picking market cycles and regularly trades properties to lock in profits.

Kerry Stokes He followed the lead of James Packer by selling a 50 per cent stake in Seven Network to private equity company Kohlberg Kravis Roberts for about $4 billion. Ken Talbot The coalmining veteran, who owns a majority stake in Macarthur Coal, sold his chain of six hotels to Cairns pub baron Tom Hedley in October 2006 for $110 million. Talbot plans to invest the proceeds of this sale in a private mining group. Talbot Group Holdings recently invested $26.4 million in Timor Sea explorer Karoon Gas Australia.

Lang Walker In November 2006, Lang Walker sold a $1.1 billion chunk of his property portfolio to listed property group Mirvac. West Australian investor and Rich 200 member Stan Perron also purchased some assets.

Besen family In March 2006, the Besen family sold a half share and the management rights to its Highpoint Shopping Centre for a mammoth $621 million.

Hannan family After an emotional sale process, the Hannan family sold the newspaper, magazine and online assets of its Federal Publishing Company to News Corporation for an undisclosed sum, believed to be about $340 million.

Knowles family The Knowles family company, Australian Retirement Communities, sold a portfolio of 17 existing retirement villages (home to nearly 4000 residents), three villages under development and six villages in the planning stages to listed property company Stockland in February for $329 million.

Smorgon family In June 2006, the Smorgon family agreed to sell its $550 million stake in steel company Smorgon Steel into the $1.6 billion takeover by rival OneSteel. Smorgon Steel chairman Graham Smorgon said the decision was an emotional one. "But it was a business judgement that needed to be made."

The business of living
What next? That is the question that has confronted many Rich 200 members who have sold their businesses in the past year.

Greg Will, a partner at PricewaterhouseCoopers who works with wealthy clients, says it can be a difficult question for prosperous people who leave their business. "Having a large bank balance is great, but what are you going to do the next day?"

John Van Lieshout, who sold his Super A-Mart furniture for $500 million last year, is representative of many Rich 200 members who say that selling their business allows them to indulge passions such as sailing and golf. "It's a good life. I should have done this years ago really," he jokes.

Will says retirement sounds easy, but it can be very hard for men and women used to the intense lifestyle associated with running a business. Many struggle to find something to fill in their spare time. In most cases, the only thing that helps is finding another company to channel their energies into. "They get some little business interest that soon takes over and the cycle starts again," Will says.

Van Lieshout has plenty to keep him busy. He has retained the properties Super A-Mart sits on, a portfolio believed to be worth about $400 million. He has a small property development firm called Unison and he has established a small office with five staff to examine other investment opportunities. "I'm doing an apprenticeship in trying to learn about money markets and shares and investments," Van Lieshout says. "It is complex and I don't have a lot of education so it takes me a while to understand, but I am enjoying the learning process. He keeps an eye on the Super A-Mart business - it is, after all, his biggest tenant - but says he does not want to interfere with the new owners, the private equity firm Ironbridge Capital.

Van Lieshout, who prided himself on running a very tight ship at Super A-Mart, has caught up with one bit of scuttlebutt that makes him chuckle. "I have heard them say that it is one of the few businesses they haven't been able to trim any costs from."

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.

The two listed companies which upgraded their earnings outlook last week both received takeover offers this week.

Dental software group Software of Excellence upgraded its earnings outlook last Thursday, lifting its net profit forecast to $4.3 million from $3.85 million. On Monday trading was halted while news of a conditional bid by an unnamed buyer was released.

Also last Thursday Tourism Holdings increased its after-tax trading profit forecasts to between $17.5 million and $18.5 million - up from the previous predictions of $15 million to $18 million. Then on Monday it announced a takeover bid from ASX listed MFS Living and Leisure at $2.80 a share.

Interesting timing.

Still if someone was coming round to make an offer on your car, you'd want to give it a bit of a polish wouldn't you.

Tourism Holdings shares closed at $2.73 yesterday. Software of Excellence closed at $2.72.

Woolworths lynched
As reported in Stock Takes last week, Merrill Lynch - which has been linked to UK retailer Tesco - has been in town assessing the local grocery scene.

Merrill Lynch’s Sydney-based research team has produced a report which comes to some bold conclusions about the New Zealand market.

The report is highly flattering of the Foodstuffs co-operative. Merrill Lynch analysts have rated it the best example of a co-operative business they’ve seen (sorry Fonterra). They also say Foodstuffs is providing Woolworths (which owns the rival Progressive chain) with the toughest competition it has faced in any business. Wow.

Citing examples of the speed with which Foodstuffs has responded to match or better proactive pricing moves by Progressive, the report concludes that Woolworths could not win a price war with Foodstuffs.

And despite Woolworths' best efforts, Foodstuffs continues to gain market share, it says. Foodstuffs is dangerous because it has a unique, "patriotic, highly efficient and almost family-like" ideology which is difficult for Woolworths and its equity analysts to fully understand, the report concludes.

Apart from the faintly patronising tone (Foodstuffs comes off as some sort of hardy barbarian tribe that will never bow to the Roman Empire) it's glowing stuff.

The report portrays the co-operative's position as so strong that it is probably the last thing Foodstuffs management needs the Commerce Commission to be reading right now as it fights for the right to buy The Warehouse.

There are still growth prospects for Woolworths in New Zealand - but only if it stops trying to beat Foodstuffs on price, the report says.

The analysts also make the case for Woolworths being a likely buyer of The Warehouse - but we already knew that.

So, where does all this leave us on the The Warehouse sale prospects?

The Australian newspaper has reported that Tesco is now a serious contender for at least parts of the Coles empire. There’s been no denials and if correct it seems reasonable to assume that Tesco would also look seriously at The Warehouse.

In relative terms it's not a huge purchase ($22 billion plus for Coles vs $2 billion or so for The Warehouse). And the distribution synergies would make a double buy compelling.

Tesco has also been linked to Woolworths with the assumption that Woolworths might buy the general merchandise parts of Coles (which wouldn’t attract the ire of competition regulators) and Tesco would take the grocery.

Of course, a research report by the Merrill Lynch broking team doesn't equal proof of interest from the Merrill Lynch investment banking team.

But what it does mean is that the local market is now exciting enough to warrant a rare foray across the Tasman by Australian analysts.

The Warehouse shares closed down 1c at $6.95 yesterday.

Airport stocks defy dollar's drag
A look at the top-performing stocks for the year so far shows Air New Zealand still leading the pack with returns of 61 per cent. Tourism Holdings is now second after the takeover offer this week - up 41 per cent. Michael Hill continues its strong run up 39 per cent.

But most interesting is the strong performance of Auckland International Airport, which hit a record high of $2.63 yesterday (it closed at $2.61) despite the fact that the high dollar is largely a negative for the company as it is likely to dampen foreign visitor numbers. The stock has delivered returns of 22 per cent for the year to date.

Goldman Sachs and Macquarie are understood to have been big buyers in the past few days.

A possible reason for the surge in buying is a belief that the airport may be about to spin off some property assets in a listed trust to take advantage of the portfolio investment entity (PIE) tax changes kicking in on October 1.

Conventional wisdom would suggest three key factors holding sway over AIA shares. The dollar, which has moved unfavourably in the past six weeks, is a negative.

That is offset slightly by the strong growth of AIA's biggest customer, Air New Zealand, which is increasing passenger numbers with the addition of new routes such as Vancouver and Shanghai.

The airport's new price regime - due to be in place later this year - is another positive. It is almost certainly going to mean an increase in revenue although how much of a jump is still to be determined. There are those who believe the airport cannot afford to push prices up too much or it risks copping a new regulatory regime from the Government.

Another positive factor is the market enthusiasm for infrastructure stocks, considered a safe bet by those who fear the long bull run may be drawing to an end.

But none of these explains the recent sharp surge.

An independently listed property subsidiary makes a lot of sense. Property management provides a sizeable revenue stream for the airport and the tax changes will be lucrative for listed property trusts.

Stocks such as Kiwi Income and and AMP Property Trust have already risen this year as the positive benefits of the change have been factored in.

Listed property entities will get a tax-favourable status as portfolio investment entities. Taxpayers now have to pay additional tax on dividends from property trusts.

But under the proposed changes, the investors’ tax rate will be capped and could be the same as the property entity’s tax rate. Most entities have tax credits and pay well under 33 per cent tax.

Tourism takeover
Valuations of Tourism Holdings were all over the show prior to the $2.80 per share takeover offer from MFS Living and Leisure this week. But they had one thing in common - no one thought it was worth $2.80.

Just last week Goldman Sachs JBWere had the value as low as $1.90 but following the profit upgrade yesterday it revised its view to $2.10.

Forsyth Barr’s Rob Mercer was most optimistic with a pre-offer valuation of $2.58 (he has raised that to $3.17 this week).

ABN Amro's David Oxley had it at $2.09 prior to the bid but has now upped that to $2.80.

UBS and First NZ have also both raised their valuations to $2.80 in the wake of the bid.

The success of the takeover ultimately hinges on the response of US private equity consortium Sterling, Drake and Associates. They hold a 20 per cent stake which they have been steadily building for the past 12 months. Buying by the consortium prompted Stock Takes to speculate on the prospect of a THL takeover last year.

Presumably the US grouping had identified THL as an undervalued company but whether they were planning a bid of their own or whether they were just counting on an offer like this one emerging remains to be seen. Investors clearly don't rate the chances of a rival bid emerging. THL shares closed up 2c at $2.73 yesterday.

Dollar downgrades
Goldman Sachs JBWere has made some more currency related downgrades to two more export stocks. Pumpkin Patch and Cavalier Corporation both get their 2008 earnings forecasts dropped by about 4 per cent in a note by analyst Rodney Deacon.

Revising his forecasts to reflect Goldman's latest currency projections, Deacon drops the 2008 Pumpkin Patch profit forecast to $38.3 million. He also drops the 2009 profit forecast by 2 per cent to $46.8 million.

His valuation drops slightly to $3.91. That's because his model runs forecasts all the way out to 2020 and the currency revisions impact only on the next three years.

However, Deacon also retains a long-term "buy" recommendation on the stock and it closed up 13c at $4.48 yesterday.

Any short-term weakness should be seized as a long-term buying opportunity, he writes.

Cavalier has its net profit forecast for 2008 lowered 4.5 per cent to $215.9 million and 2009 dropped by 1.9 per cent to $16.9 million. As well as the dollar, Cavalier still faces challenges from weakness in the New Zealand market, he writes.  Deacon values the stock at $3.08 and rates it as a "hold" long term.  Cavalier shares closed up 12c at $3.20 yesterday.

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.

STILL KICKING ...
The tyres, that is. At least that is what we are being told about the long-running sale of Restaurant Brands.

The company promised a definitive call on sale prospects by the end of the month and, despite delivering its full audited result yesterday, chairman Ted van Arkel maintains he won't talk about the sale process until April 30.  It could be that final talks are going down to the wire, although there are few in the market who view the situation with that much optimism.

The last potential buyer - likely to be CVC Asia Pacific - must surely be tempted to drop out and come back for another go on its own terms when a few issues have been resolved.  The share price has already sagged to pre-takeover talk levels and may sink further if the sale process is declared a failure. That would make the prospects for a hostile bid pretty good.

It is also likely that prospective buyers would rather wait and see if the turnaround at KFC can be maintained, and if there is any hope of a similar revival for Pizza Hut, before they make a commitment. If the company can continue to make some operational progress then revived sale prospects might not be so bad in the long run.  Restaurant Brands shares closed at 92c yesterday.

ENDANGERED SPECIES
A small announcement from the NZX this week could mean big changes to the way shareholders get the lowdown on a company's progress.  Basically, the NZX is bringing its regulations in to line with changes to the Companies Act so that - in theory at least - big glossy annual reports could be a thing of the past.

One reader was quick to point out all publicly listed companies should be encouraging shareholders to opt for electronic reports - from an environmental and financial perspective.  But companies also needed to ensure that the electronic reports are user friendly: "Simply reproducing a multi-column report for reading on a computer monitor is a sign of laziness." Which is a fair point, although there are also plenty of shareholders out there who still like to get the full report in the mail.

The economic practicality of printing reports for all shareholders will vary from company to company.

But, as the NZX's Elaine Campbell points out, shareholders will have the right to tell companies what they want. Making that clear in no uncertain terms is the key to making this change work.

AIR NZ EFFECT
It's great to see a soaring local stock impacting on valuations in Australia. It's usually the reverse of course, with anything the Rinker takeover deal to the Coles furore prompting New Zealand investors to reassess relevant values on this side of the Tasman.

But Australian commentators seem to have noticed that Air NZ's stellar run is making the Macquarie-led consortium's bid for Qantas look a bit ordinary.

The Sydney Morning Herald this week noted that Qantas shares had risen 28 per cent since rumours of the private equity bid began to circulate last November.  But Air NZ shares have doubled in the same period, the paper notes.  Ironically, it was the takeover bid for Qantas that was originally tipped one of the reasons for the resurrection in Air NZ's market value.

But a strong operational performance combined with some relief on the fuel price front seem to have left that theory back on the tarmac. In fact Air NZ has now risen 158 per cent since it bottomed out at $1.08 last August. Shares closed up 12c at $2.79 yesterday.

AIRPORT WARS
Meanwhile, still on an aeronautical theme, Infratil - owner of Wellington Airport and enthusiastic "would-be" developer of Whenuapai Airport in Auckland's north west - is more than a little miffed at the news that Auckland International Airport (AIA) has been funding local opposition to the development.

Infratil director Tim Brown has found a story in community newspaper the North Shore Times which says AIA has provided Whenuapai Action Group with $19,000 to fight plans for the airport.

Infratil has long expressed interest in developing the old airforce base at Whenuapai as a second commercial airport for the region.

Brown says he now intends to check the legality of the funding relationship. "It is hard to see how it would be in the spirit of the Commerce Act to be funding a vociferous group opposed to the establishment of a competitor," he says.

"At least the AIA team are not the Brethrens, so are probably not praying for divine intervention on their side."

GPG PURCHASE
Guiness Peat Group has built a war chest of more than $700 million which it is likely to spend on a new acquisition, concludes Goldman Sachs JBWere analyst Rodney Deacon in his latest report on the listed investment company. Deacon has taken another look at the group in the light of last week's sale of the Australian Wealth Management (AWM) business - which has delivered the investment company a cool A$267 million.

The timing of the AWM sale was in itself a little surprising, Deacon noted. He bases his view on the belief that the Australian wealth management industry is generally considered to be in a growth phase with potential for further consolidation. AWM was also still in the process of integrating the Select Funds business and the corporate superannuation business it had acquired from Zurich Financial and Genesys. "We think it is questionable whether the full benefit of these transactions has been fully factored into the share price," Deacon writes.

And no reason for the sale was provided by GPG management. The only logical reason for sale is a belief on GPG's part that Australian equities are near a peak.

The question now is what will GPG do with the proceeds - which take the amount of cash on the balance sheet to more than $700 million by Deacon's calculation. The Coates business is now largely self-funding and none of its other businesses need the capital. That makes a fresh acquisition the most likely option.

GPG shares closed up 1c at $2.33 yesterday.

TESCO IN THE WAREHOUSE RACE ...
The race for The Warehouse (due to get the starter's gun today, Commerce Commission willing) looks set to get more crowded.

Well-placed market sources say investment bank Merrill Lynch has hit town, hired by British grocery giant Tesco to scope out the Red Shed auction.

Tesco has long been tipped as potential buyer, with rumours dating back to a supposed meeting during Stephen Tindall's UK visit last year.

But just how Tesco might fit into a potential bidding war remains unclear.

Also this week, sources in the Australian media linked Tesco to a Woolworths bid for Coles, so it looks increasingly like there is some big-picture stuff going on behind the scenes. Tesco management has been highly public about its aggressive international expansion plans in the past year. Foodstuffs and Woolworths have been in the starting blocks for months.

Today is the Commerce Commerce's third deadline for ruling on who is allowed to buy. But considering what's at stake it would be thoroughly unsurprising if the runners are once again left waiting for another month.

Meanwhile, in the calm before the storm ... trading in The Warehouse shares has slowed to a near standstill. The share price has drifted sideways from a $7.11 close last Friday to yesterday's close of $7.10.

OLD DOG DOES NEW TRICKS
Stalwart Wellington retailer Kirkcaldie & Stains sometimes looks like a bit of a throwback on the NZX.

It all seems a bit Are You Being Served? in these days of global retail conglomerates. But Kirks is obviously doing something right because its shares hit a three-year high this week. On Tuesday the company reported its half-year profit had more than doubled to $747,000, allowing it to resume paying dividends.

Strong Christmas and summer trading, including the end of season sale, boosted sales by 11.5 per cent to $22 million, the company said.

The store has expanded from its traditional Lambton Quay home and now has a cuisine store in Wellington's Harbour City Shopping Centre.

It's also worth noting that the canny Sir Selwyn Cushing and his family investment company H&G took a five per cent stake last year.  And a group of Wellington property investors trading under the name LQ Investments has held a 19.9 per cent stake since March last year.

So it could be that new strategic stakeholders have provided management with some fresh motivation.  The shares closed up 10c yesterday at $3.10.