Australia | Feb 26 2007
By Chris Shaw
When management at Coles Group (CGJ) rejected a proposal from KKR a few months ago it was based on the belief the company was being undervalued given the turnaround potential and unrealised value within the group the company would realise through executing a restructuring of operations.
Fast forward a few months and it’s goodbye to earnings guidance and hello private equity players as the company has turned itself into a red spot special and hung up the “For Sale” sign, acknowledging its forecasts from a few months ago are likely to fall around 10% short of previous guidance, at least in FY08.
The question becomes then how much is the company worth, but finding a simple answer is difficult given the market now lacks confidence in management’s earnings guidance. Merrill Lynch is an example, as the broker suggests the longer the current management team remains in place the worse is likely to become the company’s operating performance. It sees no alternative to a takeover and has upgraded its rating on the stock to Hold from Sell as a result, but suggests the price for any deal remains uncertain.
Those hoping for a premium may end up disappointed in the broker’s view, as it suggests if the operating problems are serious enough and cost enough to fix the result may be an offer somewhere close to the current share price. While the board may be proven to be vindicated in the decision to reject the $15.25 proposed by KKR last year the broker also doesn’t see a lot of upside, as the longer the process takes the more chance for a further deterioration in performance.
ABN Amro agues along a similar line, suggesting any sale will take some time to finalise. This makes estimating a price difficult, so the broker rates the stock as Sell as the proceeds available from selling on market now may exceed what is achieved by the time any sale is agreed upon.
Smith Barney Citigroup is a little more optimistic and sees a bid in the range of $16.00 eventuating, while UBS estimates the best outcome for shareholders would be something close to $17.60. The broker expects any final bid to be above $15.25 and JP Morgan agrees, pointing to a best case outcome of something north of $17.00. Again, like the other brokers it points out the negotiations will take time and this creates uncertainty with respect to the value of any deal.
Following the company’s about face in strategy the FNArena database shows the stock as rated Outperform once, compared to five Hold ratings and three Sell/Reduce recommendations. The average price target shows brokers don’t expect a significant premium from current levels, as it now stands at $14.95 compared to $13.19 previously. On a stand-alone basis valuation on the stock ranges between $13.00 to $14.00.
Shares in Coles are slightly weaker today, as at 2.45pm the stock was down 7c at $15.68.