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Coles Shares Fall After KKR Exits Bid Group

Shares in Australia's Coles Group fell nearly 4% on Tuesday after private equity group Kohlberg Kravis Roberts pulled out of a consortium planning to bid for the retailer.

Shares in rival bidder Wesfarmers jumped as KKR's withdrawal increased its chances of securing Australia's second largest supermarket chain, analysts said.

KKR said late on Monday it had abandoned its latest attempt to buy Coles due to concerns about the health of some of the retailers' businesses following two weeks of due diligence, just hours after partner CVC pulled out.

"It clearly it weakens the position of the private equity consortium, and it should enhance Wesfarmers' position," said CommSec analyst Grant Saligari. "They are valuable assets, but everything has a price, and there needs to be an assessment of the downside risks as well. While there is tremendous upside in turning around the supermarkets, there is a risk that everything might not go to plan," Saligari said.

The KKR group also includes Bain, Blackstone Group, Carlyle Group and TPG. A spokesman for the consortium said the bid group was still alive but could not rule out further changes.

KKR has been pursuing the troubled retailer since August last year. It made two offers for Coles last year that were rejected by the board as being too low.

Rival retailer Woolworths is also eyeing some Coles assets but has not yet decided whether to team up with the private-equity group, sources have said.

Wesfarmers has already offered A$19.7 billion ($16.2 billion) for Coles, or A$16.47 per share, and amassed a 12.8 percent voting stake. "While the consortium's bid is not yet dead, the withdrawal of KKR clearly reduces the bidding tension for the retailer somewhat and raises Wesfarmers' probability of success," analysts at NAB Capital said in a note to clients.

A source familiar with the situation said they would not be surprised if more members of the consortium dropped out, but it was unclear when this could happen.

However, each individual buyout firm had the financial firepower to go it alone, the source said. TPG is now seen as playing a leadership role in the bid group.

Wesfarmers started due diligence on May 25 and will attend management presentations on Tuesday on the core food and liquor business.

The Australian conglomerate has teamed up with Macquarie Bank and private equity groups Permira and Pacific Equity Partners.

Wesfarmers tried to raise its stake in Coles with a higher A$17.25 offer price earlier in May, which would have valued the company at A$20.6 billion, but was rebuffed by institutional holders.