Wesfarmers Ltd., which owns Australia's largest hardware chain, has agreed to buy retailer Coles Group Ltd. for A$20.7 billion ($17.7 billion) in cash and stock, in the country's biggest takeover.

The deal, if approved by shareholders, will end a protracted process since Coles put itself up for sale in February after struggling with falling sales. Last year, it rejected two offers from private equity firm Kohlberg Kravis Roberts.

Wesfarmers, whose Bunnings is Australia's leading hardware chain, will pay A$4 in cash and 0.2843 Wesfarmers shares for each Coles share, valuing each Coles share at A$17.25 -- a 7 percent premium to Coles' Friday close.

Based on Wesfarmers last traded price, the equity value of the deal is A$20.7 billion. Wesfarmers will also take on net debt of A$1 billion.

I'm surprised Coles is able to extract A$17.25 given that it appeared Wesfarmers were the only people at the table bidding for the assets, said Richard Herring, director at Burrell & Co. Let's hope Wesfarmers hasn't underestimated the task ahead.

Shares in Coles, Australia's second-largest retailer, and Wesfarmers are suspended from trading and will resume on Tuesday.

Wesfarmers had to bid solo for the troubled supermarket chain after its private equity partners, Permira and Pacific Equity Partners (PEP), withdrew over the weekend.

The private equity firms were unable to make a deal stack up after a sudden jump in the cost of credit in U.S. markets over the past week, a source familiar with the situation said.

Wesfarmers was the only bidder for the entire Coles group after a rival private equity bidding group led by TPG quit the race last Thursday, also citing the rising cost of credit in the U.S. amid concerns over subprime mortgage loans.

Wesfarmers, which snared 12.8 percent of Coles in a share raid in April, said it expected to complete the deal in October and planned to hold on to all Coles businesses, which include 2,900 supermarkets, liquor stores, the Kmart and Target discount chains and Officeworks office supplies stores.

VALUABLE ASSET

We're not unhappy. From our point of view, as a Wesfarmers holder, we're pleased to see it go this way, Argo Investments managing director Rob Patterson said. It's a valuable asset. They (Wesfarmers) are going to work very hard on it.

Wesfarmers was aided in its cash and scrip offer by a 21.4 percent surge in its share price since late May as its prospects for winning Coles kept improving. Wesfarmers shares closed on Friday at A$45.73, a record high.

Coles shares closed on Friday at A$16.12. They hit a record A$17.89 in May, but had fallen back as rivals bidders pulled out.

The Wesfarmers' offer values Coles at 23 times forecast 2008 earnings, higher than local rival Woolworths Ltd.'s 21.3 times and British retailer Tesco Plc.'s 17 times.

Coles said the offer has no conditions related to financing or competition regulator clearance, and noted the offer was a 19 percent premium over its price on February 22, before the sale process was announced.

I think it's certainly a good price for Coles shareholders considering where the share price had been in the past and it's not far off its high point, said Michael Heffernan, senior client adviser and strategist at Austock Stockbroking.

Particularly as most of it is going to be in the form of scrip, which the shareholders should appreciate given the capital gains tax issue.

The announcement appears to leave no room for rival Woolworths, which lodged its own bid for some of Coles' units at the weekend.

A source close to the situation said earlier on Monday that PEP may still have a management role, which analysts said could be critical in helping turn around Coles' core supermarkets business.

Steven Cain, a former executive at Coles and UK supermarket chain Asda, is a director at PEP and has been touted as having the experience necessary to help Coles catch up with its more successful rival Woolworths.

Coles was advised by Deutsche Bank and Carnegie Wylie, while Wesfarmers was advised by Gresham Partners and Macquarie Bank.

($1=A$1.17)

Australia