Paul McIntyre: Ball flicked back to raiders' court

The infamous Battlestar Galactica - otherwise known as Coles Myer's sprawling headquarters in Melbourne - was buzzing yesterday but the noise wasn't pretty - 2500 heads will roll, equating to a third of the head office workforce.

It is part of a brutal cut to save the retailer A$353 million ($405 million) a year and an ambitious overhaul Coles Myers top brass deemed necessary to at least temporarily head off those US private equity raiders from Kohlberg Kravis Roberts (KKR) trying to buy the conglomerate for more than A$16 billion. If the deal was to proceed on the original offer, it would have been Australia's biggest ever corporate takeover. If KKR remains a player, its payout will now have to be much bigger.

Thanks to a slick three-hour presentation with 200 pages of facts, figures and forecasts to analysts, fund managers and journalists on Thursday by Coles Myer chief executive John Fletcher and chairman Rick Allert, KKR's initial offer at A$14.50 a share is dead.

Some are suggesting after this week's show by Fletcher and Allert that any raider - and there is another circling from Europe - might have to pay close to A$20 per share to entice shareholders. That is because Coles Myer has flagged a A$1 billion profit for 2008 and earnings per share of A$1. It was a massive step up - 40 per cent to be precise - on the consensus 71c a share forecast by the market before this week for 2008.

Rick "Not Alarmed But" Allert, as he's been nicknamed after KKR's intentions came to light last month, was blunt in his message about KKR and any would-be raider.

The [KKR] price substantially undervalued the company and the conditions were completely unacceptable, he said. You can't be much more certain than that.

Allert and Fletcher rolled out a suitcase full of strategic detail on Thursday that has already settled the market. Coles shares rose 2.9 per cent on Thursday to A$14.61. Part of the market massage included Fletcher and his crew taking a 10 per cent pay cut which will be offset by incentives up to five times higher if their grand restructuring plan bears out as he forecasts.

All the takeover and restructuring focus this week overshadowed Fletcher's good news for 2005-06. Net profit was up 13.9 per cent to A$787 million. But it was essentially the future earnings guidance and restructuring strategy unveiled 11 weeks ago to a disastrous market reaction which took the spotlight. Coles Myer's share price slumped to around the A$10 mark after Fletcher said he would fold the K-mart, Liquorland and Bi-Lo brands into a unified Coles offer.

What emerged this week went part of the way to explaining how he was going to do it. At least 80 new SuperCentres combining the general merchandise offer of K-mart with Coles Supermarkets and Liquorland would be rolled out with 40 happening next year. It is essentially a copied strategy from UK retailer Tesco, where more than a quarter of its sales come from just 6 per cent of its big multi-offer outlets.

The booming Target chain and Officeworks, however, remain on their own although there has been much conjecture that the company would offload Target to private equity bidders, much like the recent A$1.4 billion divestment of the Myer department store chain.

Allert and Fletcher blasted that idea this week.

There are no plans to quit Target and no plans to quit Officeworks. We see them as important parts of growing shareholder value, Allert said. And Fletcher was equally agreeable, particularly about Target. Anything that grows profit from a A$3 million loss in 2001 to A$250 million five years later, you'd have to ask why you would be wanting to sell a business that good, he said. Fletcher has been overhauling Target into a mini-department store, stocking more fashionable lines and launching a youth fashion segment in many stores.

The retailer's single biggest shareholder, Premier Investments, with 5.8 per cent of stock worth A$1.08 billion, remains highly critical. Premier is chaired by Sir Ron Brierley and a spokesman said this week that they have significant doubts regarding the quality and sustainability of the company's reported financial results under current management.

Still, Coles Myer has successfully flicked the ball back to private equity playmakers and investors can only hope for a lucrative counter.