Australia's second-largest retailer, Coles Group, agreed to a A$22 billion (US$19 billion) bid, including debt, from conglomerate Wesfarmers, in the country's biggest takeover.
The deal, if approved by shareholders, will end a protracted auction process since Coles first put itself up for sale in February after poor performance. Last year, it rejected two offers from private equity firm Kohlberg Kravis Roberts.
Wesfarmers, which owns Australia's largest hardware chain, Bunnings, will pay A$4 in cash and 0.2843 Wesfarmers shares for each Coles share, which it said valued each Coles share at A$17.25. That represents a premium of 7% to Friday's closing price for Coles.
"I'm surprised that Coles is able to extract A$17.25 given that it appeared that Wesfarmers were the only people at the table bidding for the assets," said Richard Herring, director at Burrell & Co. "Let's hope that Wesfarmers hasn't underestimated the task ahead of them," he said.
Wesfarmers, which snared 12.8% of Coles in a share raid in April, said it expected to complete the deal in October.
Managing Director of the Perth-based conglomerate, Richard Goyder, told a media briefing it planned to hold onto all the Coles units.
Wesfarmers had to bid solo for the troubled supermarket chain, after its private equity partners, Permira and Pacific Equity Partners (PEP) withdrew over the weekend.
The private equity firms were unable to make a deal stack up after a sudden jump in the cost of credit in U.S. markets over the past week, a source familiar with the situation said.
Wesfarmers was left as the only bidder for the entire Coles group after a rival private equity bidding group led by TPG pulled out of the running last Thursday, also citing the rising cost of credit in the U.S.
Coles and Wesfarmers shares are suspended from trading and expected to resume on Tuesday.
Wesfarmers was aided in its cash and scrip offer by the 21.4% surge in its share price since late May, as its prospects for winning Coles kept improving. Wesfarmers shares closed on Friday at A$45.73, a record high.
The Wesfarmers' offer values Coles at 23 times forecast 2008 earnings, higher than its more successful competitor Woolworths at 21.3 times and UK's Tesco at 17 times.
Coles said the offer has no conditions attached related to financing or competition regulator clearance.
It noted the takeover price was a 19% premium over its price on Feb. 22, before the sale process was announced.
Wesfarmers had originally planned to take a 50:50 stake in Coles' core supermarkets business with its private equity partners, and own 100% of the general merchandise units, but is now bidding for the entire group on its own.
After rising to a record A$17.89 in May, Coles shares dived as members of the private equity consortium pulled out, and on Friday closed at A$16.12.
Coles has 2,900 supermarkets, liquor stores, discount Kmart and Target stores, and office supplies stores Officeworks.
A source close to the situation said earlier on Monday that PEP was still in talks with Wesfarmers about a management role, which is seen as critical by analysts to help turn around Coles' troubled core supermarkets business.
Steven Cain, a former executive at Coles and UK supermarket chain Asda, is a director at PEP and has been touted as having the experience necessary to help Coles catch up with larger rival Woolworths.
Without equity partners, however, Wesfarmers is likely to take on a larger amount of debt and may make a rights issue to fund the takeover, which will double the size of the company.
"It's a very big bite for Wesfarmers without its partners, no doubt about it. But if they can retain (retail executives) Steven Cain and Archie Norman to turn it around, it should all work out," said an analyst at an investment bank.
Norman, a Briton, is a former head of Asda, and has a consulting role with the Wesfarmers consortium.
The joint announcement appears to leave no room for rival Woolworths, which lodged its own bid for some of Coles' units at the weekend.
Coles had set a Saturday deadline for bids, four months after putting itself up for sale in February because of poor performance in its core food and liquor business.
Coles is being advised by Deutsche Bank and Carnegie Wylie, while Wesfarmers is being advised by Gresham Partners and Macquarie Bank.