David Jones Seen Luring LBO on Lowest Value Since ‘04: Real M&A
With David Jones Ltd. (DJS) trading at the lowest price to its net assets in eight years, the Australian department store’s real estate is making it a buyout candidate.
Competition on the Internet from American retailers, including Saks Inc. and Nordstrom Inc. (JWN), and Australian savings rates that are more than double those in the U.S. have sent shares of Sydney-based David Jones down 51 percent in the past year. After Australia’s second-largest department store operator also projected its smallest annual profit in six years, the company is trading at 1.4 times the value of its assets minus liabilities, a level not seen since May 2004, according to data compiled by Bloomberg.
While the slump has pushed David Jones’ market value down to A$1.2 billion ($1.2 billion), its real-estate holdings alone would be worth as much as A$1 billion if sold and leased back, Bank of America Corp. said. With Australia’s central bank now cutting interest rates, and David Jones in need of a turnaround, now is the time for potential buyers to look, according to Commonwealth Bank of Australia.
David Jones’ real-estate portfolio is “something tangible that investors can hold onto when there’s capitulation in the market,” said Robert Penaloza, Sydney-based head of equities at Aberdeen Asset Management Ltd., which oversees about A$18 billion in Australia. “The company still has a decent brand name and its positioning in the market is still valid.”
David Jones rose as much as 2.7 percent today, the most in a month, and ended up 1.4 percent at A$2.23 a share. The benchmark S&P/ASX 200 Index increased 0.7 percent today.
Helen Karlis, a Sydney-based spokeswoman for David Jones, had no comment on takeover speculation.
Australia’s oldest department store, David Jones was founded in 1838, half a century after Britain started sending convicts to the country. The company is named after the Welsh-born immigrant that opened a central Sydney store to sell “the best and most exclusive goods,” according to its website.
The four sites that David Jones owns, one each on Elizabeth Street and Market Street in Sydney and two on Bourke Street in Melbourne, account for a quarter of the retailer’s sales, Karlis said. They are adjacent to some of the priciest retail strips in the world, according to Kevin Stanley, research director of property consultants CBRE Group Inc. (CBG), the world’s largest commercial real estate services company.
“The pedestrian flows in these areas are very high,” he said. Sydney is the world’s third-most expensive city for retail rents after New York and Hong Kong, and Melbourne the eighth-most expensive, ahead of Milan, Frankfurt and Chicago, CBRE said in a report last November.
Revenue at David Jones, which sells everything from ties and fragrances to suitcases and cameras, peaked at A$2.1 billion in the year ending July 2008, according to data compiled by Bloomberg. It will fall about 10 percent from that high to A$1.9 billion this fiscal year, analysts’ estimates compiled by Bloomberg show.
David Jones, which didn’t include an online strategy in its three-year plan released in 2008, trails rivals in tapping the web. Comparing itself to 10 retailers including New York-based Saks and Nordstrom, David Jones said in March it generated the smallest proportion of total sales -- less than 1 percent --from the Internet. U.K. department store operator John Lewis Plc ranked first with 17 percent, while Saks and Seattle-based Nordstrom each derived about 9 percent of revenue online.
U.S. and foreign retailers that ship to Australia are capitalizing on an Australian dollar that has climbed 27 percent against its U.S. counterpart in the past three years. In Hong Kong, StrawberryNET sells a jar of Clinique Daily Relief moisturizer for A$55, a price that includes shipping to Australia. The same product at David Jones’ online site is offered for A$90, 64 percent more.
Higher Borrowing Costs
After Australia recovered from the global financial crisis that peaked in 2008, David Jones and the country’s other retailers have struggled as interest rates climbed to 4.75 percent, the highest in the developed world.
The savings rate among Australian consumers reached 12.6 percent in December 2008, a level last seen in 1986, according to data compiled by Bloomberg. At the end of 2011, it was 9 percent, still more than double the pace before the financial crisis and about twice the personal savings rate in the U.S. at the same point.
The central bank this month made its steepest cut to borrowing costs in three years, reducing the benchmark rate to 3.75 percent.
A potential buyer of David Jones will need a plan to solve its problems by lowering prices, investing in technology and expanding its Internet platform, said Andrew McLennan, an analyst at Commonwealth Bank in Sydney.
‘Pretty Good Deal’
“When these things are under a fair degree of cyclical pressure and there are some structural concerns, this is the time to have a look at them,” he said. “If some of those structural concerns can be overcome and the cycle recovers, you’ve ended up with a pretty good deal.”
David Jones forecast its lowest annual profit since 2006 for the year ending in July, spurring an 11 percent drop in its shares on March 21. In the past year, the stock is the worst performer among 22 Australian retailers with a market value greater than $100 million, data compiled by Bloomberg show.
Down 51 percent in that period, compared with an average drop of 5.4 percent for the group, David Jones is trading at 1.4 times the value of its assets minus liabilities, or book value, of A$803 million. That’s the lowest multiple since May 10, 2004, data compiled by Bloomberg show.
The slump has created an opportunity for an acquirer to capitalize on the value of David Jones’s real estate in Sydney and Melbourne’s central business districts, according to Silvia Spadea, an analyst for Bank of America. If sold and leased back, the stores in Australia’s biggest cities may be worth as much as A$1 billion, Spadea wrote in a note last month. Spadea didn’t return a request for an interview.
“David Jones is unique” compared with most retailers in owning its valuable property assets, Spadea wrote. An external party, such as a financial buyer, “would be in the best position” to monetize the assets.
Using a “mid-point” valuation of A$800 million, the real estate is worth A$1.52 a share, according to Bank of America, which based its estimates on consultations with several property developers, according to an April 12 note. David Jones shares closed at A$2.20 last week.
Any buyer taking this route would be following the lead of Fort Worth, Texas-based TPG Capital, which bought Australia’s largest department store chain Myer Holdings Ltd. (MYR) for A$1.4 billion in 2006, said Michael Simotas, an analyst at Deutsche Bank AG. The buyout firm sold the retailer’s flagship property, next door to David Jones’s Melbourne store, the next year for A$605 million.
“The property is certainly a factor and there is value that could be unlocked,” said Sydney-based Simotas. “The appetite for those assets would be quite reasonable.”
David Jones sold the stores once, only to reacquire them in September 2006 for A$362 million to regain control of redevelopment and avoid rising rental payments, according to data compiled by Bloomberg.
Rents for the best retail locations in central Melbourne have increased by an average 7 percent a year since 2006 and now stand at A$8,700 per square meter, while those in central Sydney have risen by 2 percent a year to A$11,500 per square meter over the period, CBRE’s Stanley said.
TPG, which refurbished stores and boosted Myer’s profits, sold the retailer in an October 2009 initial public offering that valued Myer at A$2.4 billion. A buyer of David Jones would also have to see an opportunity to turn the fundamentals around, said Simotas, who has a sell rating on the stock.
“Normally when a sponsor looks at a business like this, it wouldn’t rely on getting an acceptable return using financial engineering alone,” he said. “It would like to think it could improve the business by making management or structural changes.”
David Jones Chief Executive Officer Paul Zahra, mapping out a strategy in March under what he called the toughest conditions in his 30 years of retailing, said he’ll increase the number of products available through the website to 90,000 from 9,000. The company will lift online sales to about 10 percent of total revenue from less than 1 percent, it said.
Potential buyers of David Jones may be deterred by the prospects for Australian retail, said Martin Duncan, a fund manager at Arnhem Investment Management in Sydney.
“It would be highly unlikely because of the generally dour outlook for retailing,” said Duncan. “The outlook continues to be bleak because consumer confidence continues to be weak.”
Australian consumer confidence in May stagnated near the lowest level this year as concern about the global economy and the Greek debt crisis offset the central bank’s rate cut. From a year earlier, confidence was down 8.3 percent, according to a Westpac Banking Corp. and Melbourne Institute survey.
The slump in confidence hasn’t stopped buyout funds from pursuing local consumer companies. KKR & Co. approached Pacific Brands Ltd. (PBG), Australia’s biggest underwear maker, in January. TPG Capital offered to buy surfwear maker Billabong International Ltd. (BBG) in February.
“We know private equity are having a sniff around these assets, generally,” said Commonwealth Bank’s McLennan. “There have been a lot of headwinds in the Australian household sector which will not stay around forever, so let’s not get too depressed about the retail sector.”
With David Jones trading so near the value of its assets, there’s the chance to make money through a takeover, said Penaloza at Aberdeen Asset Management.
“Interest rates are low, you can probably borrow enough to buy the assets, sweat the assets and perhaps sell it on when times are better,” he said. “Online is another way of shopping but it’s not going to kill the bricks and mortar.”