“KKR, and their offer of $15.25, has gone – at least for 2006. If Coles fails to deliver on their profit target, we may see KKR, or another bidder, back with an offer that makes the $15.25 seem very generous”. Crikey 23 October 2006

The commentariat has the Wesfarmers bid for Coles in deep water. Stephen Bartholomeusz has it in double trouble, Stephen McMahon has it teetering toward collapse and John Durie invokes an iceberg.

Coles is reported to be willing to walk away from the Wesfamers deal. Chairman Rick Allert appears fixated on his belief that Coles is worth more than $17 a share. The market is telling him it is most definitely not.

The Coles board met last week for two days and I thought the lead agenda item was how to sustain the takeover. It now appears that Allert is prepared to play a game of brinkmanship in his attempt to get a sweetened deal from Wesfarmers.

Having rejected the KKR $15.50 bid last October, Allert finds himself with a huge problem. The sequelae of the subprime mortgage contretemps has pushed world markets down and seems to have put private equity largely out of the Coles picture. Coupled with some market nervousness about the CGJ-WES nuptials, Allert now has a bid from Wesfarmers that is worth a little more than $15.20 — and egg all over his face.

Let’s get the imagery right here. Allert might believe he can hold a gun at Wesfarmers’ head, but he is holding it against his own. If the Wesfarmers deal falls over, Coles’ share price will go into free fall.

Allert’s first duty is not to save his reputation; it is to his shareholders.

Difficult as a lower value may be to accept, one thing is very clear. Coles, including board, staff, institutional investors and mumndad shareholders, have no option other than to accept the Wesfarmers offer – at whatever number the market finally decides it is worth.

There is, however, a glimmer of hope in a report that TPG may be interested in cutting a deal with Wesfarmers. TPG have been in and out of the bidding for a while, either alone, with KKR, or potentially with Woolworths, but eventually withdrawing without putting an offer on the table. They may bring cash and management expertise to sweeten the deal and spread the risk.

Whatever happens next, right now Coles, along with its subsidiaries, is absolutely stalled by recent events. The company needs a new board and a large measure of new leadership to produce a level of stability that will allow the company to resume normal business.

Footnote: In February, Allert announced the appointment of Mick McMahon as COO so that group CEO John Fletcher could oversee the bid process. Tooronga insiders say Fletcher hasn’t been seen for weeks. Has anyone caught sight of him recently?

Rob Lake publishes Brandish – Retail Intelligence, a fortnightly newsletter about things retail.

DISCLOSURE: My company Orex has recruited hundreds of managers for Bunnings and my wife owns a few Coles shares. I am a boofhead for advising her not to sell her Coles shares at $17.80.