Coles shareholders may be excused for getting excited at Wesfarmers’ recent announcement titled ‘Update on Wesfarmers offer for Coles’. But, alas, there’s been no increase in the bid price – not yet anyway. Instead, Wesfarmers announced that it would allow Coles shareholders to choose either the original offer of $4.00 in cash per share plus 0.2843 of a Wesfarmers share, or a ‘maximum shares’ or ‘maximum cash’ offer. This means Coles shareholders who prefer to receive 100% Wesfarmers shares as offer consideration, or a higher proportion of cash, will be able to make that election.

Otherwise, little has changed, although the cool market reaction reinforces our belief, previously stated on 11 Jul 07 (Hold – $40.91), that Wesfarmers will need to sweeten the merger terms. Indeed, Coles is already hinting that it will ‘continue to monitor … the value of the proposal before finalising its advice’. The scheme booklet is expected to be released in mid-September and, until then, we recommend you HOLD both companies.