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Wesfarmers Set to Win Coles as Rival Seen Bowing Out

Australia's Wesfarmers $17 billion bid for retailer Coles Group looked set for success after a source said a rival group led by private equity firm Texas Pacific Group was likely to pull out. The group was set to walk away after talks with retailer Woolworths over a joint bid broke down, the source familiar with the discussion told Reuters on Thursday.

"It's very likely they will withdraw," the source said.

If it does, that would leave the A$19.7 billion (US$15.1 billion) offer from conglomerate Wesfarmers as the only one on the table. It would be the largest takeover in Australian corporate history. Coles shares fell below Wesfarmers' offer price on the prospect, while Wesfarmers rose as much as 1.6% to a record high. But the bid process remained mired in confusion as both Coles and the TPG consortium said no-one had withdrawn.

"Specifically, the TPG-led consortium this morning confirmed that meetings previously arranged for today between Coles Group and the consortium's bankers were proceeding," Coles said in a statement.

"We have not announced that we are withdrawing," a spokesman for the TPG consortium said.

The other partners in the consortium were Blackstone Group and Carlyle Group. Three other members of the original consortium of six, including Kohlberg Kravis Roberts, pulled out in late May.

"It completely changes the game. If and when TPG goes, there is no auction process any more," said a second source familiar with the situation.

"Whether they decide to just capitulate and surrender to Wesfarmers or whether they decide to break the business up, it will take longer." Coles shares fell 2.8 percent to a low of A$16.43, below Wesfarmers' A$16.47 per share bid. Wesfarmers, which peaked at A$44.99, was up 0.4% at A$44.47 in midday trade.

Woolworths Link

The private equity consortium had been considering a link-up with Woolworths, Australia's largest supermarket chain, which is interested in Coles' office supplies chain Officeworks and discount retailers Kmart and Target but which would not be able to buy its food or liquor businesses due to competition concerns.

The consortium would need a listed partner such as Woolworths to be able to offer scrip and hence capital gains tax relief, an advantage already held by Wesfarmers and its private equity partners Pacific Equity Partners, Permira and Macquarie Bank.

"We remain keenly interested in purchasing Officeworks and either Kmart or Target," a Woolworths spokesman said. This was the case with or without a private equity partner, he said.

Coles put itself up for sale in February after struggling in its core business and losing market share. Takeover prospects have kept Coles trading at a price to earnings ratio of 25.8, similar to Woolworths' 25.6 and higher than the 17.5 for British supermarket chain Tesco.

If Wesfarmers becomes the only bidder, the other alternative for Coles would be to break itself up. But analysts said that apart from the delays and complexity involved, it was not clear whether Coles would consider handing its two most profitable businesses to competitor Woolworths.

"If TPG do pull out, Coles are in a tough position because there is only one buyer. They are slowly damaging the business so there is that incentive for Wesfarmers to get in sooner than later," said Tyndall Investment Management analyst Craig Young. He said Wesfarmers would want the recommendation of the Coles board, which would help with Coles' large base of small shareholders.

"The easiest way to get that is give the board a chance to save face by letting them get out at a decent price," he said.

A Wesfarmers spokesman said the company was not locked in to the A$16.47 per share offer, which was indicative and subject to due diligence. "What we are doing now is firming up our final view on value," the spokesman said, declining to elaborate.

The bidding deadline is June 30.

Wesfarmers already has a 12.8% stake in Coles via a surprise share raid in April.