Wesfarmers has improved its takeover bid for Australian retail group Coles after the value of the original deal was undercut by Wesfarmers' falling share price.

The two companies say the enhanced proposal "is designed to give Coles' shareholders greater certainty about the value of the Wesfarmers' proposal in the current environment of market volatility."

Under the new bid, price protection will be provided for half of the share component of the offer.

This means shareholders offered AUD4 cash, along with just over one Wesfarmers share for every four Coles shares they own. They are also entitled to additional Wesfarmers shares if its price slips below a certain level.

The Coles board "unanimously" recommends the new proposal, with chairman Rick Allert saying it provides "an opportunity to participate in the future growth of the combined Wesfarmers/Coles Group.

Wesfarmers' managing director Richard Goyder added that the new arrangements would deliver positive outcomes for all concerned.

"This modification of our offer reflects our confidence in the value of the transaction to shareholders of both companies. We are confident that the improvement we will bring to the Coles' businesses, in conjunction with our existing businesses, will be reflected in a strengthening share price."

Coles Group and Wesfarmers in July agreed a cash and share takeover offer totalling around AUD$22bn (US$17.7bn) - a deal that will create Australia's largest retailer. Coles Group sells apparel and general merchandise through its Target chain, and operates in Australia, New Zealand and Asia.

The enhanced Wesfarmers' proposal will be put to Coles' shareholders at a meeting planned for early November 2007.