Lowering its earnings guidance in the face of a poor performance from its supermarket division, Australia’s second largest retailer Coles has said that after several approaches the group has commenced a review process to assess the possibility of a sale of some or all of its businesses.
Immediately following the announcement, Coles’ share value shot up 8.55% to close at A$15.75 (US$12.46) on Friday (23 February). However, speculation that the high returns demanded by private equity investors would put a price cap of around $19bn, or $16 per share, tempered investor enthusiasm today, with shares dropping slightly to $15.68. Coles rejected an offer of $15.25 a share last year.
Rick Allert, Coles chairman, said that several informal approaches had prompted the board to review ownership options for the group. Allert said that the board would assess the possibility of restructuring the group or opting for a 100% sale, establishing a formal process to assess offers.
While Allert maintained that Coles’ management strategy was sound, he did concede that the company’s growth rate would be slower than previously envisioned.
“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,” Allert said.
According to Coles, Carnegie Wylie and Deutsche Bank both independently confirmed that that the value of the company remained “substantially” above $15.25 per share.
John Fletcher, group CEO, will oversee the ownership review, assisted by the company’s external advisers. To ensure Fletcher has the necessary time to devote to the review process, Mick McMahon has been appointed chief operating officer of Coles retail businesses (Supermarkets, Liquor and Express).
Lowering its earnings guidance, Coles said that the performance of all units other than its supermarket division was in line with expectations, contributing to net profit after tax for the first half of $501m, subject to audit.
While fiscal 2007 net profit after tax is expected to remain in the order of $787m, the company said the contribution from supermarkets would be lower than anticipated.
Looking to fiscal 2008, Coles said earnings are expected to be approximately 10% lower than the previous guidance of $1,066m net profit after tax.
Fletcher said that although the company was adjusting earnings guidance for FY08, it had made strong progress in implementing some components of the strategy. “On the plus side, business simplification has identified potential savings in excess of the $363m target outlined in September. Our Liquor business, Coles Express, Target and Officeworks have also gained strong strategic momentum,” he said.
“However, initiatives to drive top-line growth in supermarkets have taken longer to gain traction, including the rebadging of Bi-Lo to Coles which has not achieved the sales and earnings uplift envisaged. This has contributed to an easing in Food and Liquor comparative sales growth to 2.6%2 in the second quarter,” Fletcher said.
Lower supermarket sales are expected to impact results in the second half of the year and throughout fiscal 2008.
“We are spending more in supermarkets now to minimise executional risk and maximise long-term value,” Fletcher concluded.