It’s all over bar the shouting. David Jones (DJS) has fallen to an Australian run, South African owned retailer in Woolworths.
Wannabe rival Myer (MYR) showed financial discipline in declining to launch a counter offer for David Jones after the latter’s quick acceptance of the surprise $4 a share from Woolworths yesterday morning.
The offer is actually $4.10 a share because David Jones shareholders will be allowed to keep their 10c a share interim dividend.
The $4 a share offer values David Jones at $2.15 billion, which was too rich for Myer which had been struggling to sweeten its ‘merger of equals’ paper offer after its shares fell and David Jones shares rose over the past month.
The $4 on offer is the highest the company’s shares have been for three years – since early 2011.
The offer, revealed yesterday morning before trading started will see Woolworths (no relation to our giant) snap up DJS, despite all that talk from Myer about ‘a merger of equals’.
I hate to say ‘ told you so’ but a few weeks ago in discussing the possible Myer offer, I pointed out that a cash offer would have to be made by Myer to win the day.
Myer had to accept that Myer shareholders will hold less of the combined company than under the merger of equals (which was designed to maintain control for the Myer camp).
That was too much and the price of $4 cash beyond Myer’s resources or understanding, so it walked from David Jones, leaving the way for Woolworths and its Australian chairman, Ian Moir, who chairs Country Road (CTY), Woolworths’ existing investment in Australia. He was the former CEO of Country Road.
Woolworths offer is a 25% premium to the DJ’s last share price of $3.19 on Tuesday. The shares jumped to the offer price in trading yesterday and ended at $.3.91, up 22.5%. Myer shares ended up 3.9% at $2.39.
DJS YTD – David Jones leaps into the arms of Woolies
The Woolworths SA bid values DJs at $2.15 billion. Its own market capitalisation is $5.5 billion and its annual revenues are $4 billion, compared with DJs revenues at $1.8 billion.
“I am pleased that the Woolworths proposal recognises the attractive outlook for David Jones including the benefits that have and will flow from the continued implementation of our Future Strategic Direction Plan,’’ David Jones chief executive Paul Zahra said yesterday.
He has been vindicated and it took the change of chairmanship with former Lion Nathan chief Gordon Cairns assuming the top role, and getting Mr Zahra to change his mind about quitting.
David Jones and Myer had been in discussions over a proposed merger between the two department stores.
Woolworths has already built considerable experience in Australia through its control of 88% of Country Road, with Solomon Lew’s Premier Investments controlling most of the remaining listed stock.
Country Road is booming in the wake of its Witchery acquisition in mid 2012 from the private equity arm of DJ’s adviser in this deal, merchant bank Gresham. Witchery was sold to Gresham by Solomon Lew’s retail group a few years earlier. It also bought the Mimco chain of accessory stores and products.
It helped Country Road to a solid December half, with overall sales growth of 27% to $422 million and Australian same-store sales growth healthy at 5.5% – better than both our big department stores. The group is also expanding in South Africa.
Country Road is run by former Witchery boss Ian Nairn and chaired by Woolworths CEO Ian Moir, the former CEO of Country Road.
Country Road now accounts for 18% of the South African company’s total revenue – next year’s target is 20% – and with David Jones the total Australian contribution would jump to 45%, based on 2013 figures.
But Mr Lew shouldn’t hold out any hope of winning Country Road, unless he offered a knockout offer.
Country Road and Woolworths have resisted Mr Lew’s attacks on their stewardship of Country Road for years and have been proven right as the retailer’s results have improved in the past two years, thanks to the Witchery deal.
Mr Lew and Premier voted against Mr Moir’s re-election to the Country Road board at the 2013 AGM in Melbourne.
That’s hardly the way to earn the inside running, should Woolworths be forced by competition concerns, to sell down its stake in Country Road.
But Woolworths is facing a potential competition problem with Country Road a well known supplier to David Jones of men’s and women’s wear, and its line of homewares.
It is also a small rival to DJSs with the same products sold through its chain of stores across Australia.
Other suppliers to David Jones will not want to see that situation exist because they would fear Woolworths would have a very opaque conflict of interest between the two retailers it controls.
Mr Lew could always try and frustrate the bid by lobbing a higher price and try to extract Country Road as some form of ‘go away’ reward.
In South Africa, the group trades through Woolworths (Proprietary) Limited, a chain of retail stores offering customers a range of clothing, food, homewears, beauty and financial services under its own brand name. Woolworths also owns 87.9% of Country Road.
Woolworths is listed on the Johannesburg Stock Exchange trading under the code. For the 53 weeks ended 30 June 2013, Woolworths had revenue of 35.4 billion rand (called ZAR or $A3.9 billion) and net profit after tax of ZAR 2.6 billion ($A286 million).
David Jones Chairman Gordon Cairns said in yesterday’s statement : “David Jones 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 to recent share prices. It represents a substantial earnings multiple."
"In the absence of a superior proposal and subject to an independent expert concluding that the Scheme is fair and reasonable and in the best interests of David Jones shareholders, the Board of David Jones unanimously recommends that David Jones shareholders vote in favour of the Scheme.
"Subject to those same qualifications, each director of David Jones intends to vote all the David Jones shares held or controlled by them in favour of the Scheme," the company’s statement said yesterday.
Mr Cairns added that, “In reaching our conclusion that the Proposal is in the best interests of shareholders, customers and employees, the Board has considered a number of alternatives, including standalone value creation opportunities; realising the value of the freehold properties owned by David Jones; or pursuing a merger with Myer in accordance with its proposed terms. Upon assessing the alternatives before it, the Board has unanimously concluded that the Woolworths offer is a compelling option which realises value for our shareholders.”
David Jones said it will appoint an independent expert to prepare a report on whether the proposal is fair and reasonable and in the best interests of David Jones shareholders. The independent expert’s report will be included in the Scheme Booklet which is expected to be distributed to shareholders late next month.
Video – David Jones agrees to $2.15 billion takeover
