Woolworths $2 Billion David Jones Deal Bolsters Department Model

David Jones Ltd.'s Melbourne store
A customer carries a shopping bag featuring the houndstooth branding of David Jones Ltd. outside the company's Bourke Street store in Melbourne. Photographer: Carla Gottgens/Bloomberg

South Africa’s Woolworths Holdings Ltd. said its A$2.15 billion ($2 billion) agreement to buy Australian retailer David Jones Ltd. will strengthen its department store model against global competitors.

This deal will help Cape Town-based Woolworths “play on the international stage” and “breathe new life” into the David Jones brand at a time when apparel companies are expanding in South Africa and Australia, Chief Executive Officer Ian Moir said on a call with reporters today.

Woolworths will bring down prices at David Jones through more own-label sales, while introducing a loyalty-card program and boosting online revenue, Moir said. The merged group will be one of the southern hemisphere’s biggest department-store operators, according to data compiled by Bloomberg. Woolworths already has a majority stake in Australia’s Country Road chain of more than 470 shops.

“This deal means Woolworths is able to defend itself from advances from northern hemisphere retailers,” Alec Abraham, an analyst at Sasfin Securities in Johannesburg, said by phone. “It’s been doing pretty well in South Africa, but this means it has critical mass in the southern regions.”

David Jones shares rose by a record 23 percent today to close at A$3.91 in Sydney, below the A$4 cash offer. Myer Group Ltd., its main listed department store competitor, withdrew an all-stock, zero-premium merger proposal first made Oct. 28 when the target company’s shares closed at A$2.71. Woolworths shares slumped 7.6 percent to 67.90 rand in Johannesburg, the biggest decline since March 2009.

Price Premium

The sale, which has been agreed to by David Jones’s board, is Australia’s largest retail takeover since 2007, when Wesfarmers Ltd. bought Coles Group Ltd., according to data compiled by Bloomberg.

The agreement values the target at about 11.1 times the last 12 months’ A$192.7 million in earnings before interest, tax, depreciation and amortization, according to data compiled by Bloomberg. That’s a 13 percent premium to the median valuation in developed-market retail acquisitions over $1 billion in the past five years, the data show.

“It does look expensive currently, but they’ve obviously done their sums,” Evan Lucas, a market strategist at IG Ltd. in Melbourne, said by phone, referring to Woolworths.

Acquisition Funding

Woolworths is “packing the check book away” now, Moir said, referring to the prospect of making more acquisitions. The purchase will be funded through a mix of cash, debt and a sale of new shares, with the value and other details of the equity raising to be disclosed in a shareholder letter in mid-May, Moir said.

“Those chains are in a global arms race to open new stores now,” Caroline Finch, a senior analyst at Ibisworld Inc. in Melbourne, said by phone. Local retailers in Australia and South Africa have to work harder because “the H&Ms and Zaras of this world have been nipping at their heels, taking the attention of a very fashion-focused consumer,” she said.

Buying 176-year-old David Jones will give Woolworths control of an upmarket retailer in a country that has the world’s highest wealth per adult after Switzerland, according to Credit Suisse.

“The Australian economy is a little sluggish but this is a strong economy and it will come back,” Moir said. The strong Australian dollar “creates a natural rand hedge for our business in South Africa,” he said.

Woolworths was founded in 1931 in Cape Town and took its name from a U.K. chain, with which it had no connection. It also isn’t related to Australia’s Woolworths Ltd. supermarkets.

Combined Sales

Woolworths’ first-half profit increased 22 percent to 1.6 billion rand ($153 million) as demand from higher-income shoppers boosted sales.

David Jones, which has seen sales from stores open at least 12 months decline in all but two of the past 13 quarters, now stands to benefit should spending from higher-end consumers in Australia rise, Michael Simotas, a Sydney-based analyst at Deutsche Bank AG, wrote in a Feb. 11 note to clients.

The South African company currently gets about 16 percent of its revenue from Australia, where sales by Country Road have more than doubled over four fiscal years to A$706 million in the year ended last June.

If David Jones and Woolworths had been combined during their 2013 fiscal years, Australasia sales of 22.6 billion rand ($2.16 billion) would have amounted to about 43 percent of total revenue, according to a calculation by Bloomberg.

That size will help compete with offshore entrants, Moir said: “You’ve either got to accept that competition’s there and compete with it, or roll over and die.”

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