KKR walks away from another deal

KKR Quits Coles Buyout Group, Boosting Wesfarmers Bid (Update6)
By Robert Fenner and Joyce Moullakis

May 29 (Bloomberg) -- Kohlberg Kravis Roberts & Co. abandoned its nine-month pursuit of Coles Group Ltd., Australia's second-largest retailer, boosting the prospects Wesfarmers Ltd.'s A$19.7 billion ($16.1 billion) offer will succeed.

New York-based KKR withdrew from a buyout group it formed to bid for the retailer after CVC Asia Pacific quit yesterday, Ian Smith, a spokesman for the firms, said today. Coles' bigger rival, Woolworths Ltd., is in talks to join the remaining partners of the group, two people with knowledge of the matter said.

KKR and CVC withdrew after gaining two weeks of access to the financial data of Coles, whose latest quarterly sales growth was the lowest on record. Coles stock tumbled as investors bet Wesfarmers, the nation's biggest home improvement retailer, won't have to raise its record bid for an Australian company.

``This changes the landscape, as it makes the bidding less competitive and may result in a lower price for Coles,'' said Tony Pearce, who helps manage the equivalent of $3.5 billion at Legg Mason Asset Management in Melbourne, including Coles stock.

Coles stock slumped 73 cents, or 4.2 percent, to A$16.65 at the 4:10 p.m. close of trading in Sydney. Today's fall, the largest in seven months, wiped A$875 million off Coles' market value, with the company now worth A$20 billion. Shares of Wesfarmers rose 25 cents, or 0.7 percent, to A$38.04.

Final Bids
Melbourne-based Coles, the owner of 3,000 supermarkets, liquor stores and discount outlets, has called for final bids in the week starting June 25, with Wesfarmers currently examining the retailer's financial records.

The Perth-based owner of home-improvement chain Bunnings plans to keep Coles' office supply and discount department stores and spin off the grocery business to a venture with its buyout partners.

The decision by KKR and CVC to withdraw leaves TPG Inc., Blackstone Group LP, Carlyle Group and Bain Capital LLC in the bidding group. The four remaining buyout firms will discuss their concerns about the deterioration of the business with Coles management and its advisers over the next two days before deciding whether to proceed with a bid, two people with knowledge of the matter said today.
Sydney-based Woolworths, Australia's largest retailer, is yet to make a decision on whether to join the offer, the two people said, declining to be identified because details of the talks aren't public.

Woolworths Interest
Woolworths Chief Executive Officer Michael Luscombe said April 17 he may bid for some of Coles' non-food assets, which include the Target discount department store chain and Officeworks stationery and business supplies division.

Woolworths, the country's biggest grocer, can't buy Coles' second-ranked supermarkets unit because of antitrust issues.

Jim Cooper, a Melbourne-based spokesman for Coles, declined to comment. Ian Smith declined to comment further on the process. Fiona Breen, a spokeswoman for Sydney-based Woolworths, wasn't immediately available to comment.

The KKR-led group first bid A$14.50 a share for the retailer in September, then sweetened the offer to A$15.25. Both offers were rejected by Coles as too low.

The retailer put itself up for sale in February after Chief Executive Officer John Fletcher slashed the profit forecasts used to justify his rejection of the KKR bids.

Building Stake
Wesfarmers paid A$16.47 a share to build a 12 percent stake in the retailer before announcing its cash and stock bid in April at the same price. An offer to buy more stock at A$17.25 was rebuffed by investors, the Australian Financial Review reported May 2.

The KKR group said April 10 it was ``confident'' of matching or beating Wesfarmers' offer.

``Wesfarmers, with the structure of their bid and the stake they hold, meant KKR would have to offer something like A$17.50 to get it across,'' Legg Mason's Pearce said. ``Wesfarmers had a competitive advantage by ticking those boxes early so it doesn't mean they are overpaying, but beating them would have been hard and required a much higher price.''

By offering its own shares in the bid, Wesfarmers has an advantage over buyout firms because investors accepting stock in a takeover can defer potential capital gains taxes, something that can't be done with an all-cash bid. Analysts at UBS AG estimate the tax relief is worth 30 cents a share to Coles investors.

KKR's move ``leaves Wesfarmers in a much stronger position,'' said Atul Lele, who helps manage about $380 million at White Funds Management in Sydney. The future of the group KKR had led ``depends on whether the other members can raise the funds,'' he said.

Slowing Growth
Coles on May 17 said sales growth slowed to 0.6 percent in the 13 weeks ended April 13, ceding market share to Woolworths, whose sales in the period climbed 8.8 percent.

CVC Asia quit the buyout group because of concerns about the state of the retailer's business, the Australian newspaper said yesterday.
``The turnaround of Coles is not a two-year story, it's more like a four-year story,'' said Legg Mason's Pearce. ``Some private equity firms may not want to hang around that long.''

Credit-default swaps, used to speculate on Coles' ability to repay its debt, declined as perceptions of the company's credit quality improved. Five-year contracts based on $10 million of the company's bonds fell to $64,000 from $73,000 yesterday, according to data compiled by Bloomberg.

Turnaround Potential
The Wesfarmers group, which also includes Macquarie Bank Ltd., Australia's largest securities firm, and buyout firms Pacific Equity Partners and Permira Holdings Ltd., started due diligence on Coles May 25.

Deutsche Bank AG and Melbourne-based Carnegie, Wylie & Co. are advising Coles. Goldman Sachs JBWere Pty and UBS AG are advising the KKR group. Wesfarmers is being advised by Gresham Partners and Macquarie Bank.

TPG, formerly known as Texas Pacific Group, has demonstrated the turnaround potential of Coles. In March it announced an 84 percent increase in first-half earnings at Myer, the department store chain it bought from Coles last year for A$1.4 billion.

KKR agreed to sell Cleanaway Holdings Ltd. to Transpacific Industries Ltd. on May 16 for A$1.25 billion, 11 months after buying the business from Brambles Ltd. The Cleanaway purchase was KKR's first transaction with a publicly traded Australian company.