expects its shares to climb back over a$7.00 , page-2

cml signed off petrol deal with shell Coles' $250m fuel buy
By Katherine Jimenez
27may03
THE Coles Myer board yesterday signed off its delayed petrol deal with Shell Australia. An announcement is expected as soon as today.

It is understood the board met yesterday morning and unanimously approved the $250 million deal, which analysts believe could deliver a 2 per cent lift in supermarket sales. The fuel offer will also be linked to the retailer's soon-to-be revealed co-branded credit card and Fly Buys scheme.

A preliminary trial agreement for a period of between six to nine months has been signed by both parties, with the deal starting in Victoria and offering customers a petrol discount of about 4c a litre.

However, it is understood the rollout in Victoria will only be a trial run, and not a precursor to a national rollout, which could take between 12 to 18 months.

The Australian understands that about 20 sites have been selected for the trial run in Victoria.

Depending on the performance there , a wider national program will be rolled out to about 400 sites.

Shell already has a deal running with Foodland Associated on New Zealand's South Island. The terms of the deal are based on a preliminary trial of two sites.

However, the key issue for analysts in the Coles/Shell deal is the structure and how much Coles will pay. In a recent note Citigroup analyst Giselle Roux said Coles could be paying about $200 million for about 400 sites based on an average service station sales of about $500,000.

She said there was likely to be an agreement with Shell on supply and Coles could be asked to pay for the ATM network and the distribution facilities - taking the total investment to about $250 million.

Her estimates show that Coles would need about $300 million in sales for Coles to achieve 2 per cent above its current growth rate and break even in the first year on its petrol investment. Additional convenience store sales could yield Coles about $280 million in sales.

Profit margin should be in the 7 per cent to 8 per cent range, she said.

Meanwhile, Woolworths, which offers a discount of 4c a litre, is positioning itself to respond to the deal with a slightly higher discount of about 6c. A partnership deal with Caltex or Mobil is considered a strong possibility for Woolworths.

In other developments, Coles yesterday settled on its acquisition of the Theo's liquor business, which will see the Karedis family collect $125 million worth of shares.

As revealed in The Australian this month, Coles has agreed to guarantee the value of the 17.86 million shares issued at $7 for a three-year period.

It will also bear "any share price risk during that period".

This means the Karedis family will receive a minimum of $7 a share - well above yesterday's closing price of $6.58 - if they want to sell their Coles stock.

However, Coles said it could also benefit by up to $7.3 million over the next three years if the prices remains above $6.59 price, at which the shares were issued yesterday, because the balance sheet value of the asset would remain below the agreed acquisition price.

The stock fell 1c to $6.58.

http://www.thecouriermail.news.com.au/common/story_page/0,5936,6498244%255E462,00.html