Background
In 2005, Coles Myer Limited sought expressions of interest in the underperforming Myer department store business. There was significant interest from a range of Australian and International parties and the company was eventually sold to a consortium comprising Newbridge Capital and the Myer family.
Following the sale of Myer, the parent company of the remaining businesses was renamed Coles Group Limited. The remaining businesses included Coles supermarkets, Target and Kmart department stores, and Officeworks office product stores.
Coles Group continued to struggle and in February 2007, following an earnings downgrade, the company announced it was undertaking a comprehensive review of ownership options. During this review, the board considered a range of strategic alternatives and proposals from interested parties with a view to maximising value for Coles Group shareholders. The various strategic options considered included a sale of some or all of the remaining businesses and a restructuring (ie a demerger).
In March 2007, the company announced its intention to sell the remaining businesses - either as an entire package or separately.
On 2 July 2007, Wesfarmers announced its intention to acquire Coles Group. Valuing Coles Group at around $20 billion, the offer represented one of the largest takeover bids in Australia at the time. This offer was recommended by the Coles Group Board.
The takeover offer was made pursuant to a Scheme of Arrangement. As part of the Scheme of Arrangement, an Independent’s Experts Report was issued in October 2007. At a shareholder meeting on 7 November 2007, Coles Group shareholders voted overwhelmingly in favour of the sale to Wesfarmers.
FINM 7009 Group Assignment 2
Prepare a report discussing the Wesfarmers’ acquisition of Coles Group. The report should cover the following topics:
1. Strategic rationale
· Discuss the industry in which Wesfarmers operates
· Discuss Wesfarmers’ strategic rationale for buying Coles
2. Valuation
· Using publicly available information, prepare a DCF of Coles Group at the time of the Wesfarmers acquisition. Clearly state and explain all assumptions.
· How did Wesfarmers feel they would be able to improve the performance and value of Coles Group?
· Incorporating those improvements into your DCF valuation, how does this change the value of Coles Group? Clearly state and explain all assumptions.
· Discuss the key issues that impact the valuation
3. The Wesfarmers offer
· Discuss how the Wesfarmers offer was structured. Discuss the possible advantages/disadvantages associated with way it was structured. Discussion should cover the method of acquisition (ie Scheme versus Takeover) and the way it was funded (ie cash versus stock)
· Did Wesfarmers offer Coles Group shareholders a premium to acquire their shares? Discuss
4. Performance since acquisition
· How has the Coles business been performing since the Wesfarmers acquisition? Has it been in line with expectations? Discuss any key issues
· How have Wesfarmers shares been performing since the Coles acquisition? Explain possible reasons for any changes in share price performance.
Other
Information: Key details of the takeover are set out in the Scheme of Arrangement documentation and key investor presentations. Other relevant information can be found in the Coles Group annual reports. These can be found at the Wesfarmers website under Investors section – www.wesfarmers.com.au.
Key places to look for information (you will need to justify your assumptions – not simply use what’s given)
| Information | Possible source |
| Strategic rationale |
Scheme of Arrangement documents Wesfarmers announcements regarding the deal |
| Valuation | |
| Synergies (cost; revenue; other) |
Coles Group Annual reports to see historical trends Independent Expert’s Report Wesfarmers announcements regarding the deal |
| Cash flow adjustments (ie depreciation, capex, working capital) |
Coles Group Annual reports to see historical trends Independent Expert’s Report Wesfarmers announcements regarding the deal |
| WACC | Independent Expert’s Report |
| Terminal value | Independent Expert’s Report |
| Model |
To assist, a basic acquisition template will be available on wattle Students may use adapt this or construct their own |
| Offer details |
Scheme of Arrangement documents Wesfarmers announcements regarding the deal |
| Share price performance |
ASX or Yahoo Finance for stock prices News reports Company announcements |
