undervalued takeover target, page-2

Wesfarmers' Buyout Risk Increases, Credit Default Swaps Show

By Robert Fenner and Chris Young

Jan. 11 (Bloomberg) -- Wesfarmers Ltd., Australia's biggest home improvement retailer, may be the target of a leveraged buyout, according to traders betting on the creditworthiness of companies in the credit-default swap market.

Speculation that private equity firms are poised to bid has increased the risk of holding Perth-based Wesfarmers debt to the highest level ever. Credit-default swaps are financial instruments based on corporate bonds and loans that are used to speculate on a company's ability to repay debt.

Buyout firms could buy Wesfarmers to break it up, selling its businesses which also include Australia's largest insurance broker and coal mines, said credit strategist Craig Saalmann. Wesfarmers has a market value of A$14.1 billion ($11 billion).

``Wesfarmers is a pretty attractive candidate for a private equity bid,'' said Saalmann, a Sydney-based strategist at ABN Amro Holding NV in Sydney. ``Wesfarmers has six separate businesses which can be readily divested. There is no shortage of liquidity chasing good assets.''

Contracts based on $10 million of Wesfarmers' bonds rose to $55,000 from $28,000 at the start of the week, prices from ABN Amro show. An increase indicates a deterioration in the perception of credit quality and a fall suggests an improvement.

Wesfarmers spokesman Keith Kessell declined to comment. Wesfarmers shares rose 5 cents to A$37.25 at 1:37 p.m. in Sydney. The stock rose 1.5 percent last year, lagging behind a 19 percent gain in the benchmark S&P/ASX 200 index.

Record Offers

Buyout groups raised more than $29.8 billion to invest in Asia last year, according to data compiled by the Asian Venture Capital Journal. LBO firms use a combination of their own funds and debt to pay for acquisitions. They seek to expand those companies or improve performance before typically selling them within five years to other funds or investors.

Private-equity firms, led by New York-based Kohlberg Kravis Roberts & Co., are flocking to Australia, which scrapped a 30 percent capital gains tax last year for overseas investors.

Offers by buyout firms rose to a record $33.4 billion in Australia last year from $1.9 billion during all of 2005, according to data compiled by Bloomberg. That's part of the more than $730 billion that LBO firms offered globally, almost triple the amount announced in 2005.

Investors who buy credit default contracts, sold by financial firms such as New York-based JPMorgan Chase & Co. and HSBC Holdings Plc in London, are paid $10 million in exchange for the notes should the company fail to adhere to debt agreements during the next five years.

Separate Operations

Leveraged buyouts are bad for bondholders because private- equity firms typically use the company they are acquiring to borrow the money needed to finance the deal.

Wesfarmers debt is rated A- by Standard & Poor's, the fourth- lowest investment grade. The company has A$700 million of bonds on issue, Bloomberg data show.

Wesfarmers runs each of its five main divisions as separate operations. The most profitable is energy, which owns stakes in three coal mines and produces liquefied petroleum gas. Bunnings hardware is the biggest by sales.

Other units include chemical and fertilizers production, insurance underwriting and broking and the industrial and safety division which sells engineering supplies. It also has a 50 percent stake in Gresham Partners, an Australian investment bank that advised on deals worth $3.1 billion last year.

``There are at least five separate businesses you could build out of Wesfarmers as any buyer would break it up,'' said Brent Mitchell, an analyst at Shaw Stockbroking in Melbourne, who rates the stock ``outperform.'' ``Bunnings hardware would appeal to other retailers, the energy side has attraction for the resource companies and insurance could easily be sold.''

Wesfarmers net income in the 12 months ended June 30, 2006, rose 49 percent to A$1.05 billion after the company sold its rail division. Excluding one-time items, profit for the year rose 24 percent. Wesfarmers releases first-half earnings on Feb. 15.