Speculation about the sale of David Jones was first reported in March by Bloomberg, but did not surface locally until April. The reports followed meetings between Woolworths Holdings’ chief executive Roy Bagattini and banks last month.
Investment bank Goldman Sachs was reportedly the frontrunner to manage the speculated sale process for David Jones, but Woolworths has not made any public comment on the nature of Bagattini’s meetings.
The benign interpretation would be that the meetings were simply business as usual, with Bagattini having the first opportunity to talk directly with banks following Covid travel restrictions.
In that case, discussions could have canvassed the successful property sales that sharply reduced David Jones’ debt commitments following its $2.1 billion acquisition and subsequent restructuring by Woolworths Holdings.
That explanation would fit neatly with Woolworths’ dismissal of speculation about the divestment of David Jones, which posted a $31 million half-year profit despite a 9 per cent decline in sales in the six months to 31 December 2021 following Covid store closures and restricted trading.
However, an alternate construction of Bagattini’s meetings with investment banks in March is that David Jones could be considering being a seller, or indeed, a buyer, in the department store sector.
The original 2014 acquisition of David Jones is a cautionary tale for the current board and management of Woolworths Holdings as the price paid was too high and there were significant additional restructuring costs incurred in challenging trading conditions.
David Jones has been a drag on Woolworths Holdings’ financial results, and there is investor agitation pushing for the divestment of the department store chain, or even an exit from Australia that would include the Country Road Group. Indeed, Woolworths Holdings’ shares rose on the Johannesburg Stock Exchange after the Australian media reported the possibility that David Jones was likely to be sold.
Despite investor dissent, Bagattini has consistently indicated ongoing support and optimism about David Jones after its debt reduction, the pruning of costs in the business and an anticipated post-Covid trading recovery.
The key question is just how confident he and his board of directors are in the Australian department store sector, and whether it would be prudent to retain the business as it is, to exit with David Jones back to profitability, or to consider throwing good money (after bad) and make a takeover bid for Myer.
A merger is ‘inevitable’
The conventional view of the department store market is that there is not room for two major brands and that a merger of David Jones and Myer is inevitable to ensure sustainable growth and profitability.
While Myer booked a $32.3 million profit on an 8.5 percent uplift in sales to $1.5 billion for the six months to 29 January 2022, the department store chain’s share price is hovering around 50 cents for a market capitalisation of just $427 million.
Myer is vulnerable to takeover and the $427 million is a much easier sell to Woolworths Holdings’ shareholders than the $2.1 billion forked out for David Jones.
The maths on a merger make sense after both chains have reduced floorspace and cut operating costs before taking into account synergy benefits that would also be expected to include rationalising duplicated store locations.
The prospect of a cashed-up private equity play for both chains has not been discounted by retail observers since David Jones’ performance hit a brick wall, and, of course, the shrewd retail investor Solomon Lew is still considered a possible suitor.
Ironically, Lew took a strategic stake in David Jones in 2014 when Woolworths trumped a Myer merger proposal and now, conversely, has a near 20 per cent strategic shareholding in Myer.
Lew could pocket a second nice pay day courtesy of Woolworths Holdings if the South African retailer did make a bid for Myer.
A Woolworths Holdings’ bid is a viable option and would be cleaner and probably much quicker than a third-party trying to buy up and merge both department store chains.
In the scheme of things, Myer is the hunted rather than the hunter, even with Lew on its share registry.
In talks with bankers, the idea of buying is just as plausible as selling for Woolworths Holdings, provided it could convince shareholders on the home front of the wisdom and value of investing more dollars in the department store market in Australia.
In any event, conventional wisdom suggests that ultimately something has to give in the sector.