There are three reasons why investors should steer clear of the upcoming Myer float — in no particularly order, historical, macro-economic and Myer specific. That is not to say Myer shares will not make a wonderful investment, they may — although if history is any guide, that is the less likely result.
First, historical. While created more than a century ago, in its latest iteration, Myer was purchased in 2006 by a private equity consortium led by TPG. Many private equity floats do not turn out well for public shareholders in the re-listed vehicle. Recent examples include Pacific Brands, Repco, Vision Group, Bradken and Emeco — all of which ranged from flop to unmitigated disaster. The main reason for poor investor returns is that private equity seek to maximise their return, that necessarily involves selling the business at the optimal time (after growth has peaked or costs have been cut as much as possible) for the highest possible amount. As TPG noted in the prospectus, proceeds of the sale will be applied to repay existing owners and repay debt — not expand the business.
There have been a couple of exceptions to the “avoid private equity float” rule — most notably JB Hi-Fi and Invocare. However, the JB Hi-Fi example is not a pertinent one. While technically a “private equity float”, JB was purchased by Macquarie Bank’s private equity division in 2000 as a far smaller company (it had only 10 stores back then). Macquarie (and JB Hi-Fi’s brilliant CEO Richard Uechtritz, who led the 2000 leveraged-buy out) increased JB’s share price by expanding its brilliant business model across Australia. When the company eventually listed, it was able to expand organically and enjoyed very favourable business conditions.
Myer is certainly not JB Hi-Fi. It is was a well-established business in 2006 when TPG took over, and did not grow organically under private ownership, rather, it improved profitability by cutting costs much like Pacific Brands did under CVC’s ownership earlier this decade. (That said, it is encouraging that Myer CEO Bernie Brookes is retaining the majority of his holdings, while TPG is holding onto a smaller stake).
PE usually has a turnaround time of upwards of five years — the question is — why are TPG and Blum so keen to seek now? The unspoken reason is that the private equity firms are well aware of prevailing macro-economic factors. Make no mistake, TPG has some of the smartest guys in the room. In fact, the first “risk-factor” mentioned in Myer’s prospectus is most crucial — specifically, “retail environment and general economic conditions may deteriorate”.
It appears that TPG has timed its run perfectly — Australian and global economies are currently awash with government stimulus and historically low interest rates. While it is possible that the recovery will continue, there is also a substantial likelihood that a W-shaped recession will eventuate. This will certainly not be a good thing for Myer’s profitability. TPG is fully aware that its window to sell Myer is short, hence the very quick sale process in case economic conditions deteriorate after government stimulus dries up.
Finally, on a firm-specific basis, Crikey’s retail watcher was on point yesterday when he noted that adjusting for inflation, Myer’s sales have actually dipped since TPG took charge. The impressive profit growth has come from shrewd management of costs, which was helped because of the incompetence of the previous regime led by one of Australia’s most overpaid executives, Dawn Robertson. Sacking workers will undoubtedly boost profits — however, there is a limit on how many workers can be removed before sales fall. TPG has also done a good job reducing warehouses, suppliers and stock-churn, all of which have boosted profits, but are not a portent to any future earnings growth.
TPG contends that the forecast price-earnings multiple of 14.3 to 17.3 is justified on the basis that Myer plans to roll out another 15 stores in the coming five years. That is a highly ambitious aim (since TPG assumed ownership, it has introduced only six new stores in more than three years). There is also the fact that new stores are likely to be in less optimal locations. As a comparison, the most successful retailer in the world, Wal-Mart, which operates as a less-volatile discount model trades on a price-earnings multiple of 14.5. Even at the bottom end of the range, Myer certainly does not appear to be a bargain.
Myer’s ultimate sale price is still to be determined and will depend on the success of the institutional offer. TPG will be hoping that in that time, nothing happens to the global economy.
The Myer float appears aimed at retail investors, especially the three million Myer One card-holders. That is probably no coincidence. Institutions, already burned by a spate of unsuccessful private equity floats are probably less likely to be enticed by the pictures of Jennifer Hawkins and Rebecca Twigley than retail investors. That is not to criticise Myer’s management, led by the highly respected Bernie Brooks, which has done a remarkable turnaround job in quick time, earning about $1 billion for its private equity bosses but rather, that Myer’s growth prospects appear somewhat limited. It is certainly not deserving of a growth earnings multiple.
Those retail investors should be questioning: Why is the vendor selling? Is it to allow the business to grow (through the use of additional fresh capital) or because the business isn’t able to grow any more and wants to maximise its return? If the answer is maximise return, it is worth seriously questioning whether Myer would be the best place to invest savings.