Store wars: a new hope for merger between Myer and David Jones?
David Jones and Myer are already shaping up as the business story of 2014. Two of Australia’s most venerable companies are mired in a clumsy debacle that has left their 20,000 employees in limbo, with both CEOs departing, and a $3 billion merger proposal — somehow alive and dead, unthinkable and inevitable — swinging in the breeze.
David Jones chairman Peter Mason’s decision to approve share purchases by two of his directors — a day after receiving Myer’s undisclosed merger proposal, and three days before release of a market-sensitive sales update they were privy to — has gone beyond a dry governance debate about appropriate share trading windows for directors. The Australian Securities and Investments Commission did a two-month investigation into allegations of insider trading and came up with insufficient evidence, surprising most commentators, and today’s explanation in The Australian Financial Review by ASIC commissioner John Price raises more questions than it answers.
But if the regulator won’t act to take on the big fish, even under pressure from a looming Senate inquiry that is likely to be hostile, it will be up to angry shareholders to exercise their rights. That means rolling the David Jones board — either by requisitioning an extraordinary general meeting or by voting down the remuneration report at the next annual general meeting.
Meanwhile, there is a merger proposal up for discussion, and it is a curious one. Myer chief Bernie Brookes told The Australian the merger was “dead and buried” after David Jones’ initial rejection, but shareholders will have the final say on that.
If combined, David Jones and Myer would have a total monopoly over the department store sector (which excludes discount stores Kmart, Target and Big W). The question for the Australian Competition and Consumer Commission is to decide whether department stores compete solely against each other, or whether they compete against other retailers too. It is difficult to anticipate what stance the competition regulator will take — so far the ACCC has simply confirmed it was consulted by Myer last year and will review any forthcoming proposal — and the experience of Metcash and Franklins shows there can be hurdles around the competitive impact at the wholesale level. Myer’s proposal asserted a merger with David Jones would be “pro-competition”.
Most investors agree it would be hard for the ACCC to argue department stores do not compete with other retailers: the overwhelming evidence is in their declining market share. ABS figures lump the two department and discount department stores together but are broadly indicative of the long-term trend: over the last 30 years the department store share of national retail turnover has halved from 14% to 7%. Similarly, Citi analysis showed DJs and Myer’s share of non-food retailing has fallen by a third in the last 15 years, to just over 6.5%.
This is due partly to fragmentation in the retail market — with the entry of more foreign retailers and the advent of online retail — and partly due to the massive increase in shopping centre floor space developed for smaller, specialty retailers over the years.
Either way, the market share of the traditional department store is too small nowadays to sustain two operators, especially when both retailers are five to 10 years off the pace with online sales — witness Myer’s website meltdown over Christmas — and are playing expensive catch-up. Listed property fund manager Andrew Parsons, founder of Resolution Capital, says our department stores have become easy targets for retailers like Zara and Topshop — once-foreign, now here — and are also having to compete with retailers that haven’t even set up here like US department store Nordstrom and UK department store John Lewis which get up to 25% of their sales online. By comparison Myer gets just 1% and David Jones get almost 2% of sales online, and have to fund construction of websites that will only appeal to 23 million Australians.
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