Coles Special Sale Looms

By Glenn Dyer | More Articles by Glenn Dyer

Incompetence can harm a company in many ways: low share price, no profits, losses, takeover, management and board changes.

The list can have a very painful impact, especially on the investor wallet.

But who would have thought that the incompetence of the Coles board and management in botching the much heralded re-launch strategy of last September, would end up seeing the company on the market, to be sold off or broken up, and shareholders to get a price (or value) greater than the one rejected last year.

The KKR group’s rejected final offer last year was $15.25 a share: the shares closed at $15.75 on Friday after news broke of the change.

Analysts say the eventual price in any deal will be well above $16 a share, depending on what happens in the sale.

The most logical mix is: the Supermarkets sold off to a single bidder or group with Kmart tacked on, Kmart sold separately to Supermarkets which could have Target included or Target and Officeworks sold off separately or together.

There will be a number of permutations. One thing is certain though, the rejection of any bid will not happen. Coles is bound for the corporate knackery, one way or another.

But rarely have we seen a statement from a company as dramatic as that from Coles on Friday.

As an admission of failure, so soon after the launch last September of the Coles Everyday Needs approach, it’s pretty unique in the annals of Australian business.

It would seem not too many customers needed it. The elimination of the Bi-Lo name, the conversion of Bi-Low outlets to Coles (or the closure) caused sales to fall, not rise, profits to tumble, while there were similar results in Kmart with the changes to its product mix and approach.

The board and senior management, especially CEO John Fletcher, have no credibility left and all they can do is look after the company, run the sales process and maximise the price of the various assets.

Saying ‘no’ is not an option, unless the prices offered are derisory, nor will there be a repeat of the ‘go away’ message to KKR last year, not unless chairman, Rick Allert and a couple of other directors and Fletcher fall on their shopping trolleys in a form of ritual sacrifice.

There have been rumours around the retail trade that Coles wasn’t going well and these culminated in a long board meeting all day Thursday and into Thursday night that produced the two page announcement to the market on Friday.

The statement said that following the informal approaches “to its advisers in recent weeks regarding potential ownership proposals, the Board had decided to commence a process to review ownership options for the company and its businesses.

“The Board would decide whether a 100% sale or a restructuring of the Group, including demerger, would create greater value for shareholders than the current ownership structure and growth strategy.

“Mr Allert said that a formal process would be established – governed by strict protocols to ensure a rigorously competitive process – to receive and assess proposals from interested parties.

“He said that the Board believed the strategy outlined to the market in July and September last year remained sound but the growth rate in the earlier years would be slower than envisaged.

“This is a business which has more than doubled earnings and shareholder returns over the past five years. It has an exciting strategy to create significant further value for shareholders over the next five years,” Mr Allert said.

“He said that the Board had received advice from Carnegie Wylie & Company and Deutsche Bank that the value of the company remained substantially above $15.25 per share.

“Mr Allert said that John Fletcher, as Group CEO, would oversee the ownership review, assisted by the company’s external advisers.

“To ensure Mr Fletcher has sufficient time to oversee the review process as well as to lead the Group, Mick McMahon would be appointed as Chief Operating Officer of Coles retail businesses (Supermarkets, Liquor and Express).”

Among all the questions those comments raised, two points stand out.

Is Mr Fletcher the most appropriate person to oversee this review, after all the strategy of 2006, now discredited, was his responsibility?

And, as Mr Fletcher was overseeing Supermarkets, where the slowdown in sales and earnings has occurred, does that make him the most appropriate person to remain at the head of the company as a whole?

It is his revamp ideas and the dislocation they have caused to group sales and earnings which have added to whatever operational deficiencies there are in Supermarkets in particular.

He has effectively been sidelined from operational roles to oversee the ‘ownership review’. What hopes do shareholders now have that he will get that right?

The phasing out of the Bi-Lo name and chain has seen the defection of customers to other chains and a sharp drop in sales and earnings.

That was a Fletcher policy.

Coles said that while 2006-07 earnings were expected to remain around its target of a $787 million net profit, the Supermarket contribution would be down.

That profit was going to be ‘no change’ on the 2006 result, which had already upset shareholders and analysts

“CEO John Fletcher said market guidance was being revised to take account of lower than anticipated sales and earnings in supermarkets and Kmart.

“The Group’s other businesses had performed in line with or above expectations, contributing to net profit after tax for the first half of FY07 of $501m, subject to audit.

“While FY07 earnings were expected to remain in the order of $787m net profit after tax, the contribution from supermarkets would be lower than anticipated.

“Earnings for FY08 were now expected to be approximately 10 percent lower than previous guidance of $1,066m net profit after tax”.

It’s just no


About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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