What to make of Myer and its share offer?
It’s hard to say, but it does come with an uncertain background, given that it has only spent 40 months in private ownership and you have to wonder if that was enough to change the culture of a place that was ruined by dud management when part of Coles Myer.
In that time costs have been cut, but there’s been no sales growth, so earnings growth has come from the lower costs and not much else.
In fact it’s a play on the market’s current rebound, the desire for investors for a profitable float, and an expectation that retail sales will trend higher in 2010.
Myer owners, TPG (the private equity group dominates with 83%) seem more interested in maximising the return from their small investment than pricing the shares on a realistic level.
They seem to be hurrying to catch the current market upturn which has seen the local bourse rise 50% since the multi-year lows in March.
But in all deals of this kind, the valuation of the initial offer is the hardest thing to get right: either some value is left on the table and thereby accrues to the buying investors, or the deal is over-priced and fails to set the market on fire in the days after it lists.
Still, at up to $2.34 billion, the offer is the largest float we have seen since Boart Longyear was floated by Macquarie back in April 2007 well before the crash. It raised $2.6 billion for the owners and since then has struggled as the mining industry has imploded across the globe.
Boart Longyear has cut staff and offices and raised more capital in a huge secondary issue earlier in the year that seems to have staved off further pressures.
Myer and the economy and financial crunch are much changed since the start of the year, but the float is a bit of a punt on the belief that Australians will resume consuming and shopping at their old pre-crash rates once the jitters fade from memory.
That is questionable given that getting credit will be tough and Australians seem to be making a determined attempt to cut their consumption of credit, moving more to debit cards and eftpos transactions, which indicate buying activity based on available resources and price points.
Myer shares will be priced at $3.90 to $4.90 each, according to the prospectus released yesterday.
Between 479.3 million and 499.5 million shares will be offered and the company could have a potential market value of $2.77 billion.
TPG, Blum Capital and members of the founding Myer family bought the retailer in 2006 for $1.4 billion. They have reduced that by asset sales, especially a huge property in the heart of Melbourne’s CBD. There have been dividends paid to the owners and the group probably has upwards of $600 million in real money left in the company.
Myer shares are being sold at 14.3 to 17.3 times forecast earnings, compared with David Jones 17.2 profit multiple.
Myer this month reported a 15% increase in net income to $109 million in the 12 months ended July 25 on sales of $3.26 billion (which have hardly risen in the past two years, which is a bit of a worry).
Selling space at Myer has risen by around 10% in the past two years, and yet that hasn’t translated into a lift in overall sales.
It’s forecasting sales of $3.36 billion for 2009-10.
David Jones gets more profit from fewer sales: its 2009 sales were just under $2 billion (down for the year) or around 40% less than Myer and yet it earned an annual profit of $156.5 million for the year to July.
David Jones has a department store profit margin of around 9.3 cents in the dollar. Myer’s is 7.2 cents.
That’s a substantial margin in favour of David Jones and one Myer can’t hope to achieve without reversing strategy and heading upmarket towards David Jones.
Myer is the country’s largest department store retailer with 65 stores across the nation, it wants to increase this to 80 stores in the next four or five years, which is ambitious.
The company plans to pay shareholders a full-year dividend of 20.5 cents to 21.2 cents, fully franked. It says it will have pro-forma 2010 earnings per share of 27.3 cents to 28.3 cents.
The prospectus reveals that TPG and Blum could sell all of their shares into the float and leave the Myer register.
But depending on investor demand, the private equity players will have a stake in the public Myer company of between 0% and 13.5%; the Myer family will have a 0% to 1.5% after the offer. Current Myer staff will have 7.7%.
As part of the offer to retail investors, the minimum application for eligible Myer one cardholders in the priority offer is $2000 worth of shares, with employees offered the same minimum level.
Myer staff will also be offered $725 worth of shares at no cost.
Once listed, Myer will have 564.8 million to 585 million shares on issue.
Total proceeds raised from the offer by the vendors, which includes the Myer family, will be $1.94 billion to $2.34 billion.
