Qantas Drama Leaves Coles to Show How Private Equity Takeovers Work

What a positively dull weekend compared against last weekend’s mishaps and blunders.  The private equity deals will continue to arrive, and the political watchers will be keeping an eye on the latest Newspoll which is due to be released in The Australian today.

On the private equity front the Qantas takeover drama isn't quite over. Now there is the probable scenario that foreign investors have breached the 49% cap due to their eagerness to jump into the takeover battle. Ironically, it was their greed to pick up a few cents and push for a few more that ultimately saw the bid fail and turn the few pennies profit into more pennies lost - especially if they are forced sellers.

The first problem for the share price in the near term is that until it becomes public knowledge about the precise excess holding by foreign investors, domestic investors may be less keen to buy into the company at the current price. As if that isn't bad enough, if the excess holdings are significantly above 49% - say around the 60% mark - it creates a buyer’s market as investors potentially wait, and wait and wait for the price to fall to an acceptable level.

Seeing as there is little prospect for a new takeover bid coming in prior to the federal election later this year, investors will want to see a bigger risk premium built in just in case a new bid doesn't materialise at all.

As Michael Heffernan, senior adviser at Austock in Melbourne told the Sydney Sunday Telegraph yesterday, "I don't know whether the floor (under the stock) is really a concrete floor or a rubbery one. While people can argue it's been undervalued, they're not talking about the Commonwealth Bank."

He went on, "Banks don't have to worry about a terrorist attack or a government subsidising their competitors."

The next private equity takeover bid to come onto the radar is for the Coles Group.  This one isn't particularly new, it is just that it has been somewhat overshadowed by other more humorous events (Qantas).

Ominously, this one is also a consortium bid being led by Kohlberg Kravis Roberts, and supported by Carlyle Group, TPG Inc, Bain Capital, CVC Asia-Pacific and Blackstone Group. And though the Airline Partners Australia consortium was clearly a case of too many cooks spoiling the broth, KKR will no doubt hope that their own bevy of chefs do not start messing up the takeover recipe.

There is of course very else little in common between the battle for Coles Group and that for Qantas. The APA consortium had to jump through so many hoops that it wouldn't have been out of place at Cirque du Soleil. The KKR consortium will be much more comfortable keeping its cloven hooves firmly on the ground.

The other difference is that there is more than one bidder. If there could be any proof that competition encourages the protagonists to keep on top of their game then the Coles Group/Qantas comparison comes into play again. In the absence of a competing bid the APA consortium took its eye off the game, became complacent and even dare we say it, arrogant.

On the other hand, there may be plenty of testosterone about with the Coles bid, but KKR and Macquarie (again) and Wesfarmers are all completely aware that if they don't play their best game then they could very well lose. For all its other failings, the board of Coles has an excellent opportunity to showcase how the sale of a company, and the handling of the process on behalf of shareholders, should be done.

Kris Sayce
The Daily Reckoning Australia

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