Analysis: The David Jones deal

Ian Moir’s punt five years ago on David Jones eclipsing a sagging Myer has proved costly for the publicly listed South African retailer Woolworths.

The talented Moir had reinvigorated Country Road, which was majority owned by Woolworths, which has no relationship to the Australian grocery chain of the same name.

With runs on the board, Moir returned to South Africa in 2010 to an operational executive position at Woolworths before becoming CEO in November 2011.

In 2014, the Woolworths board of directors backed Moir’s knowledge of retailing in Australia and his judgment on the value of David Jones to back a takeover offer.

A win for Solomon Lew

The deal would result in the acquisition of David Jones and buy out Solomon Lew, a minority shareholder and incessant critic of the Woolworths-owned Country Road and an opportunistic buyer of David Jones shares in early 2014.

Lew’s share play in David Jones was prompted by revelations that a struggling Myer had approached the board of its then somewhat better performing rival in October of the previous year with a merger proposal.

The Myer proposal was thwarted by Moir’s overtures and, no doubt, a touch of horror about any capitulation to Myer, no matter how any merger proposal was dressed up in PR speak.

There were clearly questions about whether or not two struggling retailers could combine to create a strong, resilient and successful department store chain, irrespective of David Jones showing more positive signs than Myer back in 2013-14.

Those signs bolstered Moir’s confidence in making a play for David Jones and he backed his assessment of the company’s relative strength, market position and trading trend line with a $2.1 billion takeover bid that was accepted by the board of the Australian retailer.

However, after some initial cheer as David Jones incoming management dined on some low-hanging fruit, the retailer’s sales and earnings have declined and the bad news from Australia saw the multibrand, multicategory Woolworths’ share price halve from 2015 to 2018.

For the 2018 full financial year, Woolworths booked its first loss since listing on the Johannesburg Stock Exchange in 1997.

Woolworths is looking at succession options for Moir, although it was backing him last August to fix the David Jones haemorrhaging.

That support was before the latest writedown on the asset value of the Australian department store chain and another full financial year loss for David Jones.

Woolworths has told the Johannesburg exchange it will post another loss for FY19 after a writedown of $437 million on the asset value of the David Jones department store chain.

The writedown follows a $712 million provision last year, effectively burning around $1.15 billion of its original investment.

The $2.1 billion invested in 2014 is now worth just $965 million and although full FY19 results are yet to be announced, indications are that David Jones sales growth is flagging and earnings declining.

Merger talk rekindled

In its announcement to the Johannesburg exchange detailing the $437 million impairment for David Jones, directors also noted that a strategic review of the department store chain’s portfolio identified stores with onerous leases resulting in an additional provision of $22.4 million for FY19.

Woolworths said the impairment reflected the “economic headwinds and the accelerating structural changes affecting the Australian retail sector” as well as the performance of the business itself.

While the shrewd Solomon Lew can count the bonus payout he received back in 2014 for surrendering his long-held stake in Country Road and short-term play in David Jones, Moir is counting the losses of an opportunistic but ultimately quixotic takeover.

The current situation at David Jones may well prompt Woolworths to part ways with Moir and look to divest its sagging investment, a proposition that might well rekindle talk of a Myer-David Jones merger.

Rumours were running hot last year about a revisit of the merger plan floated back in 2013, but the questions remain about whether or not this would be the answer.

In a prospective merger, would the sum of the whole be any better than the two individual parts?


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