Coles ‘eyes Foodland’s NZ stores'

Australian retailer Coles Myer is shaping up for a shot at the New Zealand business of Australia's third-largest supermarket chain, Foodland Associated, observers say.

Analysts said the lower-than-expected share buyback announced by Coles Myer on Thursday in its interim results could mean they are keeping something back for another acquisition.

Coles is buying back A$700 million ($754.63 million) of shares in an off-market tender process, as well as converting another A$700 million of its reset preference shares into ordinary shares.

In a note to clients, Citigroup said the capital return was less aggressive than what the market had been anticipating.

"Perhaps it's an indication of it keeping its powder dry for a bid for Foodland's New Zealand business down the track," Citigroup said.

Foodland, owner of the Foodtown, Woolworths, and Countdown chains in this country, is the target of a A$846 million bid by wholesaler Metcash Holdings.

But, Citigroup added that Coles Myer rival Woolworths looked better placed to acquire Foodland NZ.

Earlier this month, Woolworths chief executive Roger Corbett admitted the company was running a ruler over Foodland.

Foodland has rejected Metcash's offer and believes it could get better value for shareholders by spinning off its New Zealand business.

Credit Suisse First Boston analyst Michael Jenneke also said the Coles Myer buyback was at the low end of expectations.

"We suspect Coles Myer is focusing on potential acquisition opportunities in food and liquor," Jenneke said.

He said the interim result last week which produced a 20.5 per cent lift in net profit to A$429.7 million in the six months to January 23, highlighted a disproportionate reliance on Target, where earnings rocketed almost 61 per cent to A$141.2 million.

"As the performance of this business cyclically peaks, we expect underlying earnings growth to slow due to competitive constraints on raising margins in the food business and structural difficulties in Kmart and Myer," Jenneke said.

CSFB lifted its 12-month target share price to A$10.30 from A$10.

UBS retail analyst Michael Peet also believed Coles Myer was on the lookout for another acquisition or planning more share buybacks over the next few years.

"Keeping the buyback small leaves room for acquisitions or will allow the stock to be bought back at a lower price, and further buybacks could be likely down the track," Peet said. "The latter is the most likely case."

Coles Myer shares firmed 5Ac to A$9.71, while Woolworths rose 6Ac to A$16.50 on Friday

Market battle

* Australia's Metcash has launched an A$846 million takeover for Foodland, owner of the New Zealand's Countdown, Woolworths and Foodtown chains.

* As part of its bid it planned to spin off the New Zealand supermarkets into a separately listed company.

* Foodland responded by saying it would do the same.

* Most analysts believe the supermarkets will be bought by a trade buyer before any listing.

- AAP