MELBOURNE—Wesfarmers Ltd believes it has arrested Coles supermarkets' declining market share as it begins spruiking a $2.5 billion equity raising to help refinance its takeover of the retail giant.
The Perth-based conglomerate today unveiled details of its plan to raise gross proceeds of $2.57 billion in new equity through an accelerated pro-rata entitlement offer.
The equity raising, along with a $US650 million fixed rate bond issue in the US earlier this month and $800 million of debt rolled over with its lenders, will complete its refinancing of $4 billion in bridging finance for Coles, which it acquired last year.
Wesfarmers also released a March quarter trading update on Coles' underperforming supermarket and liquor division, assuring investors the Coles turnaround was on track.
Total sales for the March quarter were up 5.2 per cent while comparable store sales growth for 15 weeks to 13 April was 3.2 per cent.
"We think we've arrested the market share decline in the business," Wesfarmers boss Richard Goyder told journalists.
By contrast, Australia's biggest grocer, Woolworths Ltd, booked a 6.7 per cent like-for-like growth in the same quarter.
With adjusted for food inflation of 4.5 per cent, Woolworths "real" sales growth was around 2.2 per cent.
But Mr Goyder resisted a similar calculation being applied to Coles supermarket sales.
"You can't compare the 3.2 (per cent sales growth) and the 4.5 (per cent inflation) and say `you're going backwards'.
"What consumers do when prices of certain products are moving up is they change what they'll buy.
"People will buy more home-branded products. Where they might have bought rump steak before they might buy a lesser priced meat product, for example."
While supermarkets were "fairly immune" from the current slowdown in consumer sentiment, Mr Goyder acknowledged there had been signs of some slowing in Coles' general merchandise operations, Kmart and Target.
The new shares will be offered on a one-for-eight basis to shareholders at an offer price of $29 per share, compared to Wesfarmers last trading price of $36.97.
The entitlement offer, which is in line with market expectations, is fully underwritten and is open to institutional and retail investors.
Mr Goyder and chief financial officer Gene Tilbrook said the company had opted for a large equity raising due to ongoing volatility in global debt capital markets.
"While prima facie, raising equity raises the cost of funding overall, in this case it takes out a lot of risk and the potential for contagion on interest rates," Mr Tilbrook said.
Excluding the $US650 five year bond issue - which carries an effective 11 per cent interest rate in Australian terms - Wesfarmers' cost of debt is now around 8.5 per cent, Mr Tilbrook said.
Close to $12 billion in debt was used in the $20 billion takeover of the Coles empire.
Wesfarmers' cost of equity was around 12 per cent but the $2.5 billion offering will reduce its debt-to-equity gearing from around 70 per cent to the "high 40s", Mr Tilbrook said.
"If we were refinancing a major proportion into offshore markets then we would have faced a significant increase in interest margins," he added.
Global ratings agency Standard & Poor's today reaffirmed Wesfarmers' BBB-plus long term and A-2 short term ratings but said its rating outlook remained negative.
"This is because a steady and sustained improvement in Wesfarmers' credit metrics is critically dependent on the success of the Coles transformation and overall performance of the retail businesses as well as the pace of further debt reduction," it said.
Wesfarmers shares not due to begin trading again until next Monday, but there were early signs today that investors will support the equity raising.
"On the face of it, it looks like a sensible offering," Argo Investments Ltd chief executive Rob Patterson said.
"It's fully underwritten and it seems like it might answer the questions relating to the debt.
"I think the issue will be well-supported."
Mr Goyder also said earnings from Wesfarmers' resources division were expected to increase substantially in fiscal 2009, due to the increase in market prices for export coal currently being negotiated.
"The remainder of our businesses are performing in line with our expectations," he said.
Wesfarmers confirmed its guidance for dividend payouts of at least $2 a share in 2007/08 and 2008/09.
New shares issued under the entitlement offer will be entitled to the 2007/08 final dividend, expected to be at least $1.35 per share.
Wesfarmers today also said it had secured commitments to renew a $1 billion facility, comprising one to three year debt, for working capital, at an average margin of less than 100 basis points.
The institutional bookbuild for the entitlement offer opens on Wednesday.
The retail offer opens on Monday, April 28 and closes on May 20.
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