The questions for newly reappointed Myer chief Bernie Brookes were already tough enough at the department store's recent half-year profit result. They are only going to get tougher now that his plan to pull off a cheap merger with David Jones has been torpedoed.
This morning's revelation of a $2.1 billion, $4-a-share recommended cash bid for David Jones from South Africa's Woolworths -- which sent DJs shares soaring -- leaves very little room for already stretched Myer to manoeuvre.
Myer shares traded up a couple of per cent this morning in relief they will not pursue a bid where the relative value was tilting against them. But the road ahead will be tougher with ever-increasing competition from online, new foreign entrants like H&M and -- should today's bid go ahead -- a reinvigorated DJs.
Woolworths, which owns 88% of ASX-listed Country Road (and has nothing to do with the local supermarket giant), aims to be a leading fashion retailer in the southern hemisphere (including by attracting a "younger, blacker customer" in South Africa) and had a pretty good 2013. It has a market capitalisation of 55 billion rand ($5.7 billion), total assets of 13 billion rand (including property worth 2.9 billion rand and cash of 1.9 billion rand), and total liabilities of 6.7 billion rand -- but almost none of this is debt, with only 807 million rand of outstanding interest-bearing loans on its books.
DJs is a big bite, but appears to be within Woolworths' means. This may be the last chance the Johannesburg-listed retailer gets to afford a big strategic play in Australia: the rand has only traded in one direction over the last decade, halving in value against the Australian dollar, roughly from 20c to 10c ...
Country Road is booming in the wake of its Witchery acquisition in 2012 (from the private equity arm of DJs' adviser in this deal, merchant bank Gresham) and just reported a bumper 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.
Country Road, run by former Witchery boss Ian Nairn and chaired by Woolworths CEO Ian Moir, 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%, or roughly half.
Woolworths' bid rationale is to generate buying synergies - including "common fashion seasonality" - to lower the cost of goods, and help lift DJs in the private label area. Woolworths also appears ahead on the internet, with Country Road charging to get more than 10% of its sales online in 2014-15, way above the 1-2% DJs and Myer are achieving, and winning a few accolades
for its "suggested selling" (read: spamming) strategy.
David Jones is a historic brand but it is hard to see national interest grounds to oppose a foreign takeover by Woolworths -- especially given the grim future our department stores face given their declining market share and falling sales on a longer-term basis (as Crikey has reported
), though DJs has done better than Myer.
Now it's over to shareholders. At least, refreshingly, the bid did not leak, and there was no tell-tale spike in the David Jones share price ahead of today's announcement.
It is not clear whether DJs chief Paul Zahra will stay on, if Woolworths' bid is successful. That will be up to him. Today's statement
has reassurances about sticking with DJs' current strategy. Having signed back on to the top job at Myer somewhat reluctantly, it may be that it's Brookes starting to feel tired.