Tesco and Woolworth's teaming up to get Coles

Woolworth's is considering teaming up Tesco to make a joint bid for Coles Group. Woolworth's had initially partnered with a consortium led by US buyout group Kohlberg Kravis Roberts (KKR), but now seems to be leaning towards Tesco. The offer from Woolworth's could blow Wesfarmers' $20 billion offer out of the water.

Wesfarmers, which has a 12.8 % stake in Coles, is proposing to offer Coles shareholders the option of taking Wesfarmers stock instead of cash for their shares, allowing them to defer the capital gains liability they would otherwise incur on the sale of their shares.

Both potential foreign bidders would need a listed Australian partner in order to offer shares as consideration in a takeover offer so that investors who accepted would not be hit with massive capital gains tax bills.

Woolworth's has designs on Coles' Officeworks and Target businesses, but is expected to be prevented by the competition regulator from purchasing its rival's supermarkets or liquor divisions, and, possibly, also the Kmart business.

The KKR team, whose $18.2 billion offer for Coles was knocked back last year, is unable to offer a similar inducement, as it is not listed in Australia. However, as the only listed Australian retailer with the market capitalisation needed to offer a substantial portion of its stock to Coles shareholders, Woolworths has the pick of bid partners, and is assessing a number of potential partners, including Tesco.

Tesco has spent the past decade rapidly expanding into foreign markets, and now has operations in 13 countries, including Japan, Thailand, Malaysia, China and South Korea. A move into Australia has long been expected by industry watchers, either in conjunction with one of the existing players or as a more aggressive start-up operation.

Metcash chief executive Andrew Reitzer yesterday denied that his company had talked to Woolworths about a possible joint bid.

(Source: The Australian)