Wesfarmers

High food prices may be helping supermarket operators.

Australia's Woolworths, the second largest supermarket operator in New Zealand, today reported sales here increased by 10.6 percent in the June quarter, although only 2.2 percent when normalised and an extra week's trading is excluded.

Comparable sales rose 3.5 percent, which Woolworths said reflected tighter macroeconomic conditions and a decline in the growth of the overall market. The company reports profits next month.

Yesterday, Statistics New Zealand reported food prices in the year to June leapt 8.2 percent, the highest rise in 18 years.

Woolworths bought Progressive two years ago and runs the Foodtown, Countdown and Woolworths brands, whose combined sales rose 7.3 percent in the June year to $4.9 billion.

Chief executive Michael Luscombe said the New Zealand operations were off to a better start this new fiscal year despite his earlier comment that there is "no doubt that New Zealanders are doing it tough", as weak economic conditions persist.

Mr Luscombe said economic cycles come and go and he believes that New Zealand will recover. "We want to be ready for when that happens," he said.

Woolworths said its overall food inflation for the quarter in NZ was 4.6 percent, an increase from the 3 percent experienced in the third quarter, "reflecting increased price pressure on certain products in perishables and bakery and the ceasing of price deflation in produce". Sales growth has declined from 9.9 percent in the first quarter, 5.7 percent in the second and 6.2 percent in the third.

Australia's biggest retailer reported group sales worth nearly half of New Zealand's GDP. Sales including NZ, for the 53 weeks ended June 29, rose 10.7 percent to $A47 billion (NZ$60 billion). Mr Luscombe said fiscal 2008 earnings before interest and tax (EBIT) were expected to grow faster than sales while net profit is expected to grow in a range of 21 per cent to 25 percent. On a normalised basis, which removes the impact of the 53rd week, sales were up 8.7 percent.

Woolworths has been taking customers from rival Coles, which is undergoing a major facelift under new owner Wesfarmers, which has said it will take about five years to turn around Coles. Mr Luscombe said trading in fiscal 2008 has been extremely rewarding with the business performing well overall. "The significant re-investment in each of our businesses will continue to drive future growth," he said. "These key investment initiatives include the rollout of our 2010c format stores in supermarkets and our new format BIG W, which are both progressing well."

Woolworths is still awaiting a Court of Appeal decision on whether the Commerce Commission can both Woolworths and Foodstuffs from making takeover bids for The Warehouse. New Zealand-owned Foodstuffs and Australia's Woolworths each have 10 percent stakes in The Warehouse and successfully went to the High Court to overturn the commission's decision to block any potential takeover. The Commerce Commission appealed that decision and the court case was completed in early May. Interested parties expected a decision last month.

Group supermarket sales rose to $A40.313 billion in the year, to be up 8.3 percent on a normalised basis. Sales for the Australian food and liquor business climbed 9.9 percent to $A30.5 billion in the year, with comparable sales up by 6.3 percent. Woolworths opened 30 new Australian supermarkets during the year to bring its total to 780 Australian supermarkets, and 89 Dan Murphy's liquor stores.

Woolworths also owns the Dick Smith electronics chain. Fourth quarter sales in consumer electronics rose 16.3 percent, boosted by 5 new store openings in the quarter. Comparable-store sales rose 3.8 percent.

In a move which flies in the face of the economic downturn, Australian home improvement chain Bunnings says it plans to open six new stores in New Zealand, investing $90 million and creating 500 jobs.

The big-format retailer has announced expansion plans which show its retail outlets could grow from the current 16 to 22 stores - and then to 26 in the near future. Brad Cranston, general manager of Bunnings in New Zealand, said the business would open at Westgate in Auckland, increasing its footprint in Auckland to five big stores. West Auckland was a significant growth area, and the new store would have a hire shop, free DIY clinics, a children's playground, a cafe and two levels of carparking, he said.

Cranston was not concerned about the economic slowdown. Sales turnover was down on last year and same-store sales had dropped within the last two months, but Bunnings views New Zealand as an area of high growth, he said. The sales downturn was "something of a blip" and did not affect the firm's expansion drive.

Bunnings had invested more than $250 million in New Zealand this decade, Cranston said. The business started here in 2001 following the purchase of the Benchmark Building Supplies stores and now makes annual sales of more than $500 million, Cranston said.

Bunnings owned a new Nelson store and would own the new Westgate store, he said. The Westgate deal comes after a new large-format Bunnings store was developed in Nelson, where the retailer opened yesterday. Previously, the chain announced plans to develop stores in Gisborne, Wellington's Lyall Bay and Upper Hutt, and Dunedin. Some of its new stores cover more than a hectare.

Cranston said the business was also examining establishing a further four stores after that. Outlets in Hawkes Bay, Taranaki, South Auckland and the North Shore were quite on the cards, he said. However, plans for those areas were not yet finalised.

Cranston said Bunnings was showing confidence in the market with the new projects. Retail sales have been falling, in line with the shrinking economy, but he is confident about the retail niche Bunnings has carved out since coming here seven years ago.

"The creation of these 500 new jobs will have a positive impact on the community," he said. "As well as offering new employment, Bunnings Warehouse team members are encouraged to play an active part in their local communities by supporting local community groups.

Last year, Bunnings completed the sale and leaseback of 11 retail warehouse properties in Australia and New Zealand, netting A$203 million ($229.5 million). Auckland-headquartered Dominion Funds Management bought five New Zealand properties, while Australian fund Charter Hall bought the remaining six properties in Australia.

Bunnings is owned by Australian conglomerate Wesfarmers, and its main competitor in New Zealand is Mitre 10 Mega, which is also still expanding and aiming for 20 large-format stores.

Mitre 10 has been in New Zealand since 1974 when it was introduced by 15 hardware retailers who had watched the success of the retail formula in Australia. They felt it was time New Zealanders, too, were offered the cost savings achieved when retailers could pool their orders, buy in bulk and promote nationally, Mitre 10 says. More than 120 stores are operating under the Mitre 10 banner including more than 15 Mega stores.

BUNNINGS
* Opened in New Zealand in 2001.
* Has 16 large-format stores.
* Plans to have 22 stores soon.
* Melbourne-headquartered business.
* Became a public company in 1952.
* Founded by migrants from London.

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 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.

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."