David Jones’ white knight
Myer acknowledged the cash offer from Woolworths, the listed South African retailer (which has no association with the Australian retailer of the same name, and indicated it would withdraw its “proposed merger of equals”.
After putting David Jones ‘in play’ last October with the non-premium merger plan that focused on strategic advantages and cost savings derived from a larger business, Myer has elected not to get involved in a bidding war.
When it sent its merger plan to the David Jones board, Myer effectively discounted the prospect of a rival bid, with private equity firms still nursing burnt fingers from retail investments in Australia and department stores hardly a sexy proposition as they struggle for growth.
With most overseas department store chains also battling for growth and looking to reinvent themselves to retain customers, let alone recruit new ones, the prospect of a rival bid from another retailer was considered a remote possibility.
Myer was encouraged by financial analysts who backed a thorough assessment of its merger plan rather than the immediate rejection of the David Jones board, albeit the rebuff was based on earlier analysis by the retailer of the benefits of a marriage of the two department store groups.
The enthusiasm of institutional investors and analysts was more about enthusiasm for the hunt – the possibility it could shake out other suitors, and the prospect that it might unlock David Jones property assets – than for the detail of the Myer plan.
Myer thought its plan was on track when David Jones announced two weeks ago it had appointed Macquarie Capital, Gresham Partners Advisory, along with Port Jackson Partners to assess the merger proposal.
But the advisors had another option on their desks, with David Jones already talking to Ian Moir, CEO of Woolworths CEO and former CEO of Country Road in Australia, about a bid that would provide a premium to shareholders and retain David Jones as a standalone department store.
The formal bid was announced this week, with the David Jones board recommending the generous $4 a share cash bid from Woolworths, which leaves Myer in a more challenging position than before it knocked on its retail rival’s door last October.
Myer now faces the prospect of a much more formidable David Jones in the marketplace, a rival with greater operating scale as well as an enhanced and strengthened management and board of directors.
Bernie Brookes, Myer CEO, said the retailer remains “fully committed” to continuing to progress its well established five point strategic plan with “a number of new initiatives to drive sales and profitability, while continuing to invest in the growth areas of the business”.
“Myer remains Australia’s largest full line department store business and will continue to be a robust competitor,” Brookes said.
While the Woolworths takeover will require shareholder and regulatory approvals, David Jones’ board has entered into a Scheme Implementation, which provides for the South African retailer to acquire all David Jones shares.
Woolworths is no stranger to the Australian market, having acquired an 87.9 per cent shareholding Country Road, a business which now also includes the Trenery, Witchery, and Mimco brands.
Significantly, Moir is also no stranger to Australian retail. He assumed the top job at Woolworths after successfully turning around Country Road as CEO from 2000 to 2009.
The Woolworths $4 a share offer for David Jones represents a handsome premium on recent share prices, and values the department store chain at $2.15 billion.
Gordon Cairns, DJs recently installed chairman, says the department store chain is “an iconic brand with a long and justifiably proud history”.
“This is a compelling proposal which represents a significant premium to not only our intrinsic value, but also to broker valuations and recent share prices. It represents a substantial earnings multiple,” Cairns said.
Paul Zahra, David Jones CEO, said he was pleased the Woolworths proposal recognised the attractive outlook for the business, including the benefits that will flow from the continued implementation of its future strategic direction plan.
Cairns said the board’s unanimous endorsement of the Woolworths proposal, in the absence of a higher or better offer from another suitor, had taken into account a number of alternatives, including standalone value creation opportunities, realising the value of the freehold properties owned by David Jones, or pursuing the Myer merger proposal.
Moir indicated Woolworths had considered David Jones as a possible acquisition in its forward growth plans and moved to explore the opportunity after the Myer proposal became public knowledge in February of this year.
“Woolworths is a very similar business, closely aligned in terms of our target markets and values,” Moir said.
“The combination will create a leading southern hemisphere retailer with meaningful scale, able to leverage common fashion seasonality with enhanced sourcing capability.
“We will work with the David Jones team to deliver the sound strategies they have already set in place.
“Woolworths will bring extra capability, financial strength, and significant scale to accelerate these strategies and offer a greatly enhanced value proposition, delivering on trend product within the most exciting and innovative shopping experience in the market.”
To proceed, the Woolworths takeover will need the approval of a majority of David Jones shareholders, representing at least 75 per cent of the total number of shares issued in the retailer at a meeting that is expected to be convened in June.
Woolworths has already secured funding from banks for the acquisition and will need to obtain South African Reserve Bank approval.
David Jones has 38 stores nationally and is ranked as the 18th largest retail business in Australia with annual sales of around $19 billion.
It also one of the oldest retailers in the country, tracing its history back to the 1838.
Woolworths was founded by Max Sonnenberg in 1931, officially opening the doors of its first store Cape Town.
Through franchise partnerships and corporate stores throughout Africa and the Middle East, Woolworths has more than 400 stores selling clothing, food, homewares, beauty, and financial services.
This article first appeared in Inside Retail PREMIUM issue 1995.
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