Friday, August 18, 2006

A likely bid for Coles-Myer

An announcement by Coles-Myer management yesterday suggests CM is likely to be subject to a takeover bid. A $16 billion bid for CM (a massive bid by international standards!) would have enormous Australian political implications.

CM is Australia's biggest employer and its staff are mainly vulnerable, low income retail workers so trade unions will be concerned. In addition, there will be the usual bout of jingoism based on the false perception that Australian assets vaporise when purchased by foreigners. The purchase price implied by the current CM share price is 20 times earnings which makes it look pretty expensive - retailing is a very tough business because, even though it is rather concentrated industry structure, margins are low. There are strong, comparatively new sources of competition from discount retailers such as Aldi.

It could be that there is just lots of surplus cash in international markets seeking a home. Alternatively, the high apparent price might also reflect a predator's views that there remain huge inefficiencies within CM - it does perform far worse than Woolworths on various measures. CM chief John Fletcher has publicly revealled his strategy for improving its bottom line and foreign managers may just have made the judgment that they can do a better job at this.

Should we be nationalistic about such moves? In terms of economic logic probably not. The assets won't shift location and we will probably be left with a more efficient retailing giant that will better compete with Woolworths. Mass scale retailing along Wal-Mart lines has huge potential for productivity growth via logistical and organisation reforms that offer better deals for consumers by cost-cutting. And of course the $16 billion will end up in the hands of primarily Australian shareholders which will provide a massive boost to local equity markets and enable other investment opportunities in Australia to be taken up by Australians.

But we get tend to get 'taken to the cleaners' in these types of international deals - MIM, North BH and other miners come to mind. Australians are not good at purchasing foreign assets and seem to sell their own assets too cheaply - BHP-Billiton has not, as far as I know, ever publicly eaten humble pie over its sale of a 40% interest in Woodside for a song. The Treasurer Peter Costello has said he will look at any proposed deal involving the sale of CM and he should.


Lesley de Voil said...

Hi Harry
I'm a bit puzzled that anyone would think that a company needing vast supply lines (the same salad veges are available in Cairns as in Canberra, not mentioning the out-of season and imported fruits) would, as we approach Peak Oil, be seen as a good thing. Where else would they make savings other than in labour? No wonder the unions are anxious.
Me? I'd already decided to support the local farmer's market more regularly anyway .

hc said...

Lesley, I agree labour has reason to be concerned but don't forget mass retailing is mainly logistics (transporting, warehousing and flogging thousands of items). Australia is quite a way behind the US. We can get fresher foods more cheaply if retailers are preopared to be innovative enough and to push hard on costs. Why are so many groceries so much cheaper in the US than Australia. Partly economies of scale but also more innovative retailers.

Lesley de Voil said...

I see. We tradeoff cheap clothes and groceries for the privilege of seeing the CEO's pay and perks, the profits, and control of the workforce (including suppliers) disappear overseas. It's enough to make me want the redhead from Ipswich back again.

hc said...

There care two bits to your comment Lesley.

One is nationalism - you see the control and the profits passing overseas but of course this is an exchange. The price seems a hefty one and maybe the purchasers will come unstuck. As a general rule predators don't do well - shareholders in target forms do.

Second is concern for low-income workers. I agree they will be pressured. But how far do you want to push this? Workers are also consumers - they will get biggerr real income gains as a fraction of their wages if groceries get cheaper.

Neither of these objections is clear-cut.

Lesley de Voil said...

OK, 1) nationalism. We see the control passing overseas where our government has no direct influence. As in the outsourcing a la Telstra, it doesn't look likely that much will change in the future.
2) Wealth distribution. So more workers may get more money in their pockets. But they can really only spend it in areas/on things that are determined both in quality and presence/absence by overseas firms. IOW, they are unable to make the most rational decision when buying things they need.
Where's the economic sense in that?
Further, not Australians are CM shareholders or CM employees. Thus, these people get the double negative whammy of no govt control, choice and a relatively lower amount of money to spend.
I personally am watching this one with extreme interest. Some of the foods I eat are often in limited supply. Due to the requirements of my diet, I need the services of a large retailer who can carry these items which do not offer them such an attractive profit. A retailer who is going to concentrate even more on the profit motive is a worry to me, particularly as I age and move towards losing my independence wrt transport.