April 5 (Bloomberg) -- A Kohlberg Kravis Roberts & Co.-led group is in talks with banks to borrow A$14 billion ($11 billion) to fund their third attempt to buy Coles Group Ltd., Australia's second-biggest retailer, said three people with direct knowledge of the bid.

The group may get financing for the takeover, Australia's largest, from Barclays Plc, Citigroup Inc., Credit Suisse Group, Goldman Sachs Group Inc., Royal Bank of Scotland Group Plc and UBS AG, according to the people, who declined to be identified because the information isn't public. New York-based KKR's partners are Carlyle Group, Texas Pacific Group, CVC Asia Pacific Ltd., Bain Capital LLC and Blackstone Group LP.

KKR, whose A$18.2 billion bid was rejected by Coles' board in October, is seeking to top an A$19.7 billion offer by Perth- based Wesfarmers Ltd., Australia's biggest home improvement retailer. Speculation that KKR may outbid Wesfarmers drove Coles' shares 4.7 percent higher yesterday.

``There's a greater than 50 percent chance that KKR will come back with a rival bid,'' said Scott Marshall, head of industrial research at Shaw Stockbroking in Sydney, which doesn't own Coles shares.

The financing plan includes about A$1 billion of high-yield listed notes -- a type of subordinated debt that can be offered to individual investors at coupons of more than 10 percent -- the people said. Listed notes, which trade on the stock exchange, rank behind senior debt in terms of repayment and security.

Buyout firms typically fund about 66 percent of their purchases using debt taken on by the acquired assets, to augment returns on their investments.

Record Buyouts

Henry Kravis and George Roberts, KKR's co-founders, have unveiled plans for $100 billion in purchases in the past six months, almost one-fifth of all LBOs disclosed in the period. KKR on April 2 agreed to buy First Data Corp., the world's largest processor of credit-card payments, for about $25.6 billion in the second-biggest leveraged buyout ever.

Shares of Coles rose 0.7 percent to A$16.97 at the 2 p.m. close of trade in Sydney. The stock gained 4.7 percent to A$16.86 yesterday, a day after the A$16.47 bid by Wesfarmers, Australia's biggest hardware retailer.

``With the right management, Coles shares can easily go to A$19 or A$20, so there is still money to be made,'' Marshall said. Shaw Stockbroking changed its recommendation on Coles to ``accumulate'' in early March from ``hold.''

KKR first approached Coles in August. After an initial A$14.50 a share offer was rejected, the bid was raised to A$15.25, which the board said was still too low.

Wesfarmers' Bid

``The consortium remains together and retains its ongoing interest in Coles,'' said Ian Smith, an Adelaide-based spokesman for the KKR group. ``It will continue to respect the process being run by Coles' board and its advisers.'' He declined to comment on the funding.

Goldman Sachs and UBS are advising KKR and its partners on the transaction.

Perth-based Wesfarmers is teaming with buyout firms including Sydney-based Pacific Equity Partners, London-based Permira Holdings Ltd. and Macquarie Bank Ltd., Australia's largest securities firm.

Wesfarmers' bid comes less than two months after the company said first-half profit fell 12 percent. It will keep the Target discount chain and Officeworks stores should its bid be accepted. The supermarkets, liquor stores and Kmart outlets will be placed in an unlisted joint venture with the buyout firms.

`Great Brand'

Coles last week said first-half profit rose 3.5 percent to A$501 million, compared with 28 percent growth at bigger rival Woolworths Ltd. Chief Executive Officer John Fletcher expects unchanged full-year earnings, compared with Woolworths' forecast of an increase of as much as 24 percent.

Coles Chairman Rick Allert put the retailer up for sale in February after saying it wouldn't meet profit forecasts.

``It's the second-biggest Australian retailer, great store locations and a great brand,'' Tony Pearce, who helps manage $3 billion worth of equities at Legg Mason Asset Management in Melbourne, said in an interview with Bloomberg Television today. ``These sorts of opportunities don't come very often so I think there will be some good competition for the assets.''

To contact the reporter for this story: Patricia Kuo in Hong Kong at pkuo2@bloomberg.net

Last Updated: April 5, 2007 04:07 EDT