a surprises coles investors

Looks like a better offer though a little more complicated.

Coles shareholders will get cash of $4, 0.14215 Wesfarmers ordinary shares, plus 0.14215 of the new WPPS shares along with the $0.25 per share dividend they were offered in the original proposal.

Looks like the ability to take all script or all cash is gone.


Cheers


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Perth-based conglomerate Wesfarmers Ltd has given shareholders in takeover target Coles Group Ltd a pleasant surprise with an offer of extra "price protected shares".

The new twist in the bid for Australia's second biggest retailer protects shareholders against the risk that Wesfarmers' share price will fall over the next four years, stripping value from their investment.

Investors were quick to endorse the sweetened offer pushing up Coles stock 3.58 per cent to $14.75 and Wesfarmers shares 0.6 per cent to $38.81 even as the market benchmarks closed lower.

Under the Perth-based company's original cash and scrip offer that gives Coles a $21.9 billion enterprise value, shareholders were offered $4 cash and 0.2843 Wesfarmers shares.

But the offer was becoming less attractive as Wesfarmers share price declined, sending the value of the offer down to $18.2 billion by Tuesday night's close.

Under the new arrangement, half the shares the Perth company issues to Coles shareholders will be Wesfarmers Price Protected shares (WPPS).

Coles shareholders will get cash of $4, 0.14215 Wesfarmers ordinary shares, plus 0.14215 of the new WPPS shares along with the $0.25 per share dividend they were offered in the original proposal.

"This does enhance our proposal," Wesfarmers boss Richard Goyder said.

"It does provide greater certainty, which is important. It's a really good step for both companies."

Coles' board confirmed its "unanimous recommendation" of the sweetened proposal in the absence of a superior proposal.

A report by independent expert appointed to assess whether Wesfarmers' bid is "fair and reasonable" is still being completed.

But Coles said the expert had advised that the new offer was "on an overall basis in the best interests of shareholders".

The Wesfarmers WPPS shares will be listed on the Australian stock exchange and pay a fully franked dividend of at least $2 per WPPS.

The new shares will provide shareholders with additional Wesfarmers ordinary shares in the event the ordinary share price is less than $45 at their reclassification date four years from the date of issue.

Wesfarmers said their original offer valued Coles shares at $17.25 apiece in a July 2 media release.

Mr Goyder refused Wednesday to put a value on the new offer or estimate what its upper limit would be.

"We've never ascribed a value to it and I'm not going to," Mr Goyder said.

"What it does is it gives Coles shareholders a degree of price certainty.

"This has always been a cash and scrip deal and you just can't look at, in my view, the share price on any one day."

A "mix and match" option announced by Wesfarmers earlier this month - enabling shareholders to maximise the scrip or cash proportions of the offer - remains.

Commsec retail analyst Grant Saligari compared the new price protected shares with a put option.

"It's downside protection for anyone who were to accept the offer but based on where their shares are trading at the moment it's probably got limited value to investors," he said.

Under other conditions announced Wednesday, an option allowing either side to walk away if Wesfarmers' stock fell more than 10 for 20 days consecutively has been removed.

Mr Goyder said the termination right was "probably triggered" last Friday.

Under the new deal, the break fee payable to Wesfarmers has been increased to $150 million while "no shop" and "no solicitation" restrictions on Coles have been strengthened.

Wesfarmers and Coles also have agreed to set up a team to accelerate integration and transition plans even before shareholders vote on the offer in November.

Wesfarmers' offer two months ago was worth $17.25 for each Coles share based on Wesfarmers June 29 closing price of $45.73.

But by Tuesday night's closing share price of $38.58, the offer would be worth only $15.22 for each Coles share.

That price was below the $15.25 per share offer from private equity player Kohlberg Kravis Roberts in October last year that Coles rejected.

Coles has almost 3,000 stores including supermarkets, liquor outlets and its general merchandise arms, Kmart and Target.

But declining sales in the supermarket section have led analysts to question the value of the deal, given the amount of money Wesfarmers will need to inject to make the retailer competitive again.

aap