Kohlberg Kravis Roberts

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.

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.

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.

Ex-Woolworths boss Roger Corbett says the buyer of Coles Group could pay too much for the retailer in the current bidding war and it is clear some of its assets are in great distress.

Wesfarmers, which is battling for control of Coles Group, yesterday stood by its A$19.7 billion ($22.17 billion) offer, and its rival bidder, led by the private equity group Kohlberg Kravis Roberts (KKR), remains in the picture after signalling last week that it could trump the Wesfarmers bid.

Corbett, who works as a consultant for Woolworths, said it was early days but the current bidding climate had created a scenario where rational thought was tossed aside.

"Some of the assets in Coles Myer are clearly distressed and you get a competitive type of bidding process and that gets overrated and the due diligence process and careful rational thought get underrated.

"It is a great danger in a process like this," he said, "so very clearly there is a danger - a big danger - that people are overpaid for some of these assets."

Corbett said the buyer should weigh things up carefully as there would be great difficulty in turning the Coles supermarkets around, adding "they are a long way behind in the technology stakes".

"K-Mart is run down pretty badly, so a site is one thing, but rejuvenating a brand is another, so there are some great challenges," Corbett said.

It was a great pity that the business had not succeeded as it did hold some excellent assets, he said.

"But clearly, they have run down hill and that is very sad because there are many people in that Coles organisation who have been immensely loyal and who are long-serving people.

"I think the whole scenario is sad for lots of people."

Corbett said Wesfarmers had been a takeover-oriented company for some time but he was still surprised by its bid.

KKR was involved in a failed A$15.25 a share bid for Coles last year, which eventually opened the door to the sale of the retailer.

Woolworths chief executive Michael Luscombe said his company was interested in Target and office supplies store Officeworks.

Luscombe has not ruled out joining the rival bidding consortium led by KKR, and there have been rumours of another bid by UK-based Tesco.

Asked about possible interest from the US retail giant Wal-Mart, Corbett, who sits on its board, said: "I think Wal-Mart has got its own plans in the world, and I wouldn't imagine that there is any plans at this stage for Australia."

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.

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.

Coles has rejected Wesfarmers' $A19.6 billion ($NZ21.4b) offer and warned shareholders not to sell their shares. The company will open its books to suitors tomorrow and expects to attract a higher offer.

The nation's No.2 retailer said Wesfarmers' cash offer of $16.47 a share was not high enough to be recommended to investors. Coles confirmed officially that any negotiations with Wesfarmers were over.

"Until such time as Coles' ownership review has been completed and the Coles board has made a recommendation to shareholders, Coles shareholders are advised not to sell, or grant economic or voting interests over their shares," the company said in a prior statement.

In a statement to the market this morning, Coles said it was committed to running a competitive process in relation to its ownership. "Coles Group is committed to running a fully competitive process in evaluating ownership alternatives in order to maximise shareholder value for Coles shareholders,'' the company said.

Coles said it had not indicated that the price on offer in the Wesfarmer indicative proposal would be the one it was prepared to recommend to shareholders, and advised them not to sell or grant economic or voting interests over their shares.

Wesfarmers lifted its stake in Coles a further 1.5 per cent at the weekend to 12.8 per cent after the Hedley Group pledged its shares to the bid. Coles said the Wesfarmers-led group's current interest in voting power was not enough to prevent or deter the emergence of an alternative takeover proposal.

Meanwhile, all bidders who have signed confidentiality agreements will be able to gain access to Coles's books as soon as tomorrow.

Nevertheless, Wesfarmers' chief, Richard Goyder, was adamant yesterday that his company was in pole position. He hoped he would not be caught in a bidding war although there are no signs that potential rivals have walked away.

Mr Goyder was upbeat, hoping last week's share raid and offer would give it the edge over rivals who were yet to view the books. "Part of our proposal was a request we could get in and do due diligence quickly, and the Coles chairman has indicated a preparedness to work with us on that," Mr Goyder said.

Performance figures were to be given only to those participating in the auction process Coles is running and were to be used to reassure bankers and advisers of the retailer's financial strength. Before Wesfarmers appeared on the scene, potential bidders had agreed not to make hostile offers to gain access to the figures. Those who had signed up for the auction included UK retailer Tesco, Woolworths, private equity firm Kohlberg Kravis Roberts and French group Carrefour. All are now believed to be in the wings.

Sources close to Coles last night denied Wesfarmers had been given special treatment or that the due diligence process had been fast-tracked. They said they had spent the weekend negotiating confidentiality agreements with "several parties".

Mr Goyder said his company was "happy where we are" with 12.8 per cent of Coles and did not plan to push for 15 per cent. Mr Goyder said he wanted Coles's board to quickly approve his consortium's bid but its directors are likely to spin the sales process out as far as possible to maximise returns.

With the private equity consortium led by American group Kohlberg Kravis Roberts desperately scouting around to raise enough cash to lift last year's $18 billion offer, the Coles board would be mindful that it must maximise the price for shareholders.

Wesfarmers said it hoped the sale process would be short but Coles wanted to get the best price by attracting as many buyers as possible.

"A lot will depend on the flow of information," Mr Goyder said.

Due diligence is expected to take teams of lawyers, advisers and specialist retail executives from each of the bidders up to six weeks to complete.

Employees at J Sainsbury look set to miss out a £200m [$NZ 543m] windfall due to the likely collapse of a £10bn bid for the group from a consortium led by the private equity house CVC Capital.

Details of plans to offer as many as 80,000 staff an equity stake in Sainsbury's, worth around 15 per cent of the business, emerged as CVC prepared to walk away from the supermarket chain, as its offer is likely to be rejected by the company's board.

Under the terms of the proposed deal, employees with a certain amount of service at the company would have been eligible to purchase shares in the supermarket group for a nominal fee, which would have led to a bumper payout when the consortium sold, refinanced or floated Sainsbury's at a later date.

It is also understood that, as part of its long-term strategy for Sainsbury's, CVC planned to create around 16,000 jobs at the group across the country, which would have gone some way to addressing union concerns that private equity is all about slashing costs via job cuts.

However, the CVC consortium, which includes Texas Pacific and Blackstone, is likely to walk away if, as expected, its 560p-a-share bid for the supermarket chain, tabled on Thursday, is rejected by the board this week.

Lord Sainsbury, the former science minister and the largest shareholder in the group with a voting stake of just under 9 per cent, has urged the board to reject the "inadequate" offer and stressed it should not even consider opening the books to any proposal below 600p a share. The Sainsbury family controls just under 18 per cent of the company.

KKR was part of the bidding consortium, but is understood to have withdrawn from the bid for Sainsbury's because it was nervous about the possible price the consortium was likely to have to pay. CVC and its partners are now likely to follow suit, as they believe their offer was a fair price.

Sainsbury's is understood to be considering a review of the company's property assets if the bid fails.

One option would be a complete separation of the property business, a plan which is favoured by the property tycoon Robert Tchenguiz, who owns a 5 per cent stake in the company and is said to be opposed to a bid going ahead. It is thought that the retailer's freehold property could be worth as much as £10bn.

COLES Group's chairman, Rick Allert, would have been greatly relieved yesterday when he greeted Wesfarmers boss Richard Goyder and his proposal to buy the retailer at a price well above last year's feelers at $18 billion.

Make no mistake, at $16.47 per share plus a 19.5c dividend, this is not enough to buy the company - but it's a good starting point and one that will open a bidding war with some fair dinkum contestants.

The very fact that recalcitrant shareholder Sol Lew was prepared to tip his 5.83 per cent holding into Wesfarmer's war chest was the best indication yet that the gates have opened in the race for control of Australia's second largest retailer.

There is also no doubt that Wesfarmers and its equity partners in this transaction are in pole position. Until now, the problem for Coles in attempting to undertake this auction is that there has only been one real bidder for the entire group, the syndicate led by KKR.

Thanks to Goyder, the game has now changed and KKR has little choice but to get into the bidding process and justify the time and resources it has spent on Coles and come up with a better alternative.

The price offered by Wesfarmers is shy of the mark. Coles would probably rather see $18 per share for the group and only time will tell whether this is achievable. The Wesfarmers proposal is strategically clever and fairly well executed.

In buying 11.3 per cent of Coles, Wesfarmers has snookered anyone else from launching a takeover bid with the mandatory 90 per cent acceptance limit. Wesfarmers now has a blocking stake.

Any group that wants a piece of the action now will need to pursue Coles via a scheme of arrangement: 75 per cent of the value of shares and 50 per cent of those voting at a shareholder meeting.

It would have been better for Coles that Wesfarmers did not conduct this lightning raid because it inhibits competition. Having said this, getting Lew out of the picture is a major strategic and public relations coup.

For his part, Solly Lew's Premier Investments has negotiated an escalator clause in the sale agreement whereby it will benefit from any increases in the bidding.  Premier also has options in place to get a slice of any enhanced price from another party.

Whichever way you carve it, Lew is going to come out of this process with hundreds of millions in profit, every last cent of which will be looking for a new home.

As far as Goyder is concerned, a successful bid for Coles will be both a career defining move and a company transforming event. Since taking the reins at Wesfarmers from Michael Chaney a couple of years ago Goyder has been living in the shadows. Like Chaney, Goyder is a value-driven conservative investor whose mantra is patience, timing and value. The raid on Coles is clever and strategic.

Under his proposal Wesfarmers will bid for Coles using cash and Wesfarmers scrip. There will be few if any foreign ownership problems and thanks to the scrip elements there will be some rollover relief while at the same time it will allow the current Coles shareholders to share in the upside from the renovation of these retail businesses

Goyder last night described the move as classic Wesfarmers, saying it was logical and sensible to bring these assets into the company's stable. He has the former head of Coles supermarkets, Steven Cain on board to spearhead the revival of the Coles supermarkets business.

The plan is to retain 100 per cent control of Target and Officeworks and sell the Coles everyday needs business (supermarkets, liquor and petrol) into a joint venture controlled 50 per cent by Wesfarmers. The remainder will be owned 35 per cent by Permira, 10 per cent by Pacific Equity Partners and 5 per cent by Macquarie Bank. The beauty of this offer is that, assuming the transformation of the assets, Wesfarmers will be able to keep, sell or list the everyday needs business down the track.

However, the reality is this still all comes down to price - and the ball is now in KKR's court. Until now it has been the only player in the game. For its part, KKR still sees itself as a real contestant and we should see the colour of its money sooner rather than later. The official line is that the third option of a break-up of brands is still a possibility.However, this has got to be running a poor third in this process.