452 Capital manager discusses the Coles sale process

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Australian Broadcasting Corporation

Broadcast: 10/07/2007

Reporter: Emma Alberici

Emma Alberici talks to 452 Capital fund manager Peter Morgan, who owns 3 per cent of Coles and is becoming increasingly incensed by the lack of transparency in the sale process.


EMMA ALBERICI: As we mentioned earlier, today came an announcement from Woolworths that its biggest competitor could have done without. At Woolworths stores open at least 12 months, sales rose 8.2 per cent. At Coles, same store sales are rising at just 0.8 per cent. Woolworths has revealed that it did make a bid for some of the Coles businesses, but Coles has chosen to sell the group as a whole. The game, though, is far from over. Wesfarmers shares have fallen 9.9 per cent since the agreement was struck with the Coles board. The shares are now trading at $41.18. If the stock averages less than $41.12 for 20 days, while also under-performing the benchmark index by 10 per cent, the takeover agreement can be terminated.

Peter Morgan is the principal of fund manager 452 Capital, which owns 3 per cent of Coles. He's becoming increasingly incensed by the lack of transparency in the sale process. I caught up with him a little earlier this evening.

Peter Morgan, welcome to Lateline Business. As a substantial Coles shareholder, how do you feel today to learn Woolworths has achieved something like 10 times the sales growth of Coles?

PETER MORGAN: I think, you know, all up the whole scenario with Coles has been one of disappointment, Emma. I mean, you know, the company itself has played itself into Woolworths' hands on so many occasions and I think, you know, I think as a shareholder in Coles, given what's transpired over the last couple of months, or even over the last year, you know one can only say we're disappointed.

EMMA ALBERICI: How do you feel about the way the sale process has evolved?

PETER MORGAN: I mean if you look at the share price of Wesfarmers over the month of June, it went up over 20 per cent in a market that went down. The stock went up 2 per cent for the last day of the month for whatever reason. And, you know, the Coles board has accepted, you know, funny money as an alternative and the consideration being paid by Wesfarmers as we sit here today is nowhere near the $17.25 that the board is touting and is asking shareholders to accept.

If one looks over the last year, I can count on four or five occasions, if not six or seven, that the board has said that, you know, $15 and below is substantially undervaluing the company. I mean they've said it at an annual general meeting, they've said it at the first approach from KKR, the private equity group, the second approach from private equity. They've said it all the way through the bidding process and today the share price is $15.25. It's not the $17.25 that farcically has been touted on the day of the tender processing ending, and I think shareholders deserve a lot better and they've just been treated with disdain. And I think there's a lot of glory, there's a lot of reputational (sic) protection going on at board level.

EMMA ALBERICI: How has this occurred? What happened to corporate governance?

PETER MORGAN: Well there hasn't been a lot of corporate governance. I mean, if you look at the register of Coles Myer, it's predominantly retail based. The big winner in all of this has been Solly Lew, and to his credit, he's played the game hard. God knows where we'd have been if Solly hadn't been as hard as he has been. And you know, I think, again we're getting back to the classic situation, it's a situation that's pretty prevalent today - why private equity is succeeding, boards of directors in Australia that have little money in the game that treat shareholders as second class citizens, is playing right in the hands of private equity, if I can put it that way, and it's very disappointing. It always seems to happen with these, for want of a better word, Victorian Collins Street type boards that have got no real interest in shareholders. They only seem to want to do it for their own self interest reasons.

EMMA ALBERICI: In a letter to the editor of one of the national newspapers this week, one small Coles shareholder noted that he was happy with his investment. He said he bought his shares at $6.50 when John Fletcher was installed as CEO back in 2001. He says he's now going to walk away with $16 or so. He says he can't understand what all the fuss is about. Does he have a point?

PETER MORGAN: If you're in there at $6, you're looking at $15 today. I still think there is a lot of luck that has transpired with regards to Coles. Let's not forget it was only six or seven months ago that the board and management team of Coles were telling shareholders that they could get it right, they could reorganise the business, they could set it on its merry way and show the shareholders at $15 was undervaluing the company.

Now within the space of six months of having said that, the game was off, we then had to sit back and watch the board again gamble on trying to take Coles to a tender process that at the end of the day has seen a price, probably transpiring, that's going to be less than $16 and maybe less than $15 when it all washes through the system. Sure if you're sitting back there at $6 and you've been in at $6 and you take your $15, you've made money out of it but let's not forget we've been in one of the greatest bull markets Australia has ever seen and that market itself, and you know, that market itself, the Australian share market, is up, is up 120 per cent over the last three years with dividends included.

EMMA ALBERICI: In October last year, Kohlberg Kravis Roberts, KKR, offered $15.25 in cash. It'll be October this year before the sale wraps up. Has it just taken too long?

PETER MORGAN: Well it's taken too long in a lot of ways. I mean, if one would have - if the board would have negotiated initially and shareholders would have had their money in at the start of this year, I mean, that money could have been reinvested, and again as I said, in a very strong Australian equity market.

EMMA ALBERICI: How do you intend to vote your shares in October?

PETER MORGAN: Well again, I mean we're in the extraordinary situation that we've got a share price that is falling around us and we don't, the form of view today is very hard to do in the context of the starting point being over $45 a share for Wesfarmers. As I said, to us, how that price got to $45 in that month is a little bit bemusing. If one was to take into account the current Wesfarmers share price it equates to around about $15.70 a Coles Myer share. But there's a couple of points that can played out here. It depends on what the final dividend is for Wesfarmers. It depends on whether there is any capital raising attached to Wesfarmers shares going forward. And again, it depends on the liquidity in the Wesfarmers share price itself, and what I'm saying to you, it's still pretty open to where the share price settles and what shareholders actually get for their Coles Myer share.

EMMA ALBERICI: At the end of the process, are you happy to be left a significant shareholder in Wesfarmers?

PETER MORGAN: Again, you know, we want to assess that situation. We don't think - we thought Wesfarmers was overvalued at $45 a share.

EMMA ALBERICI: How do you explain the fall in the Wesfarmers share price since the deal was done?

PETER MORGAN: Well, you've got to ask yourself was Wesfarmers shares, were Wesfarmers shares worth $45 or a touch more than $45? And as I said to you, the stock price went up 20 per cent in June in a falling market or a market that went sideways to down, and it went up 2 per cent on the last day of the month. What I'm saying to you is, now what led to that?

There's nothing publicly that's come out from Wesfarmers that's seen the share price go to those sort of levels. Supposedly you've got regulators out there that should be looking at these sorts of things and making sure the right thing is done by shareholders. But I've got my doubts as to whether - you know, that price has never been seen again, Emma, and there's not much difference to what was around at the end of June and what's around today in terms of information and information flow.

EMMA ALBERICI: Are you suggesting that the corporate regulator ASIC has a role to play here?

PETER MORGAN: I'm frustrated and I'm cynical about a Wesfarmers share price that went up 20 per cent in a month for no public apparent reason, that went up 2 cent on the last day prior to a tender process ending, and I'm just, you know, I'm frustrated with that whole process, and I think shareholders and the market - remember this is one of Australia's largest companies, deserves better than that and I can't, you know, I can't in my own mind weigh up the risk return profile of accepting the current bid.

EMMA ALBERICI: Some fear Wesfarmers might get indigestion from trying to swallow such a big business in its entirety. Do you see any merit in a break up of Coles?

PETER MORGAN: I and most shareholders, which is the difficult position we're coming from, haven't been privy to the full discussions that have gone on with regards to this whole tender process. I don't know what, you know, what the break-up scenario or what the bidding was for, say, Target - one of the best assets in Coles Myer to date was, and I don't know what the figures touted for Office Works and the like are. Now again, shareholders will perhaps be left in the dark with regards to that and you know, who knows when we get two years down the track whether Target sold at a great price to someone else and the Wesfarmers equation turns out all the better, and that's why I think the critical issue for Coles Myer shareholders is that we've had, you know, a board of directors supposedly representing us saying that the company's worth substantially more over the last 12 months above $15.20 a share, that that valuation has to be made available to shareholders so they can assess it. Otherwise, you know, we may well be selling the company on the cheap.

EMMA ALBERICI: Peter Morgan, thank you.

EMMA ALBERICI: Thanks, Emma, thanks very much.

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452 Capital manager discusses the Coles sale process

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