Australian retailer Coles Group backed an enhanced A$18.2 billion ($15 billion) takeover offer from conglomerate Wesfarmers on Wednesday, sending Coles shares up more than 4%.
An independent expert said the bid was in the best interests of shareholders after Wesfarmers tweaked the terms by offering a new price protection mechanism on half the value of the share component of its bid following recent share market turmoil.
Coles, which has now formally rejected a possible break-up in favor of the bid, said shareholders would vote on Australia's largest takeover deal in November.
"The Coles Group board unanimously believes shareholders should support the proposal as providing an opportunity to participate in future growth of the combined Wesfarmers/Coles group," Coles said in a statement.
Coles shares rose 4.6% to A$14.90 after a trading halt pending the takeover announcement was lifted. Wesfarmers, which has interests ranging from building supplies and chemicals to insurance, was up 3.2% at A$39.80.
Under the new deal, Wesfarmers agreed to pay A$4 in cash, 0.14215 of its own share, and 0.14215 in a new vehicle called Wesfarmers' Price Protected Shares (WPPS) which will be listed on the stock exchange.
WPPS are a relatively new mechanism being used in takeovers and are designed to insulate shareholders against volatile share prices.
Holders of WPPS will be entitled to additional Wesfarmers shares if Wesfarmers' share price trades below A$45 at their reclassification date. WPPS may also pay a dividend.
"You can shape a deal however you like. They want to get the deal over the line as best possible and these (WPPS) obviously offer a further level of guarantee for Coles shareholders," White Funds senior fund manager Atul Lele said.
Wesfarmers also increased the break fee to A$150 million.
Wesfarmers offered to buy Coles on July 2, but since then market turmoil and concerns about its ability to overhaul the Coles' supermarkets business have hammered Wesfarmers' shares.
At Wesfarmers' closing share price on Tuesday of A$38.58, the deal is worth A$18.2 billion, or A$15.22 a share, down from A$21 billion, or A$17.25 a share, when it was unveiled.
The deal won competition approval last month, but still needs the support of Coles shareholders at a meeting on the deal, which Coles said would be held in early November. A meeting had previously been scheduled for Oct. 25.
The board recommendation is important in winning the votes of Coles' retail shareholders.
Coles has an enormous shareholder base of "mum and dad" investors, a hang-over from an earlier discount card program offered to shareholders.
Wesfarmers, which runs Australia' largest hardware chain Bunnings, became the sole bidder for all of Coles at an auction in June after a private-equity bidding consortium led by TPG to pulled out at the last minute.