David Jones Nixed Bid, Shakeup Stokes Deal Talk: Real M&A

David Jones Ltd.’s refusal to merge with its closest competitor, followed by a board shakeup, has only increased speculation more bids will come for Australia’s oldest department store.

Shares of David Jones have rallied 8.7 percent since the Sydney-based company said last month that it privately rejected an all-stock, zero-premium tieup with Myer Holdings Ltd. This week, almost half the David Jones board including the chairman said they’re quitting following a stock-trading investigation, making a new approach from Myer more likely, said Rivkin Securities Pty.

“It’s absolutely positive” for the prospects of a deal, Shannon Rivkin, a Sydney-based director and event-driven analyst at Rivkin Securities, said in a phone interview. “A lot of shareholders are going to be pushing for a new board that’s open to at least engaging.”

Myer, which approached David Jones amid growing competition from online and traditional retailers, has the capacity to boost its bid 30 percent, Deutsche Bank AG said. David Jones’ real estate may help woo other suitors, according to Macquarie Group Ltd. Revenue at David Jones is projected to approach a record by 2016 as Internet sales soar. Even so, the $1.5 billion company is trading 19 percent below the median sales multiple of local peers, according to data compiled by Bloomberg.

‘Compelling Proposal’

“We still believe it’s a compelling proposal,” Amanda Buckley, a spokeswoman for Melbourne-based Myer, said of the $1.4 billion company’s bid for David Jones. She declined to comment on the possibility of any new offer.

A representative for David Jones declined to comment on the prospect of further offers for the 176-year-old chain.

David Jones Chairman Peter Mason didn’t disclose Myer’s approach when it occurred last October and two directors were given approval to buy shares one day after the offer was made. The company and Myer published details after the Australian Financial Review reported last month the companies could merge.

The Australian Securities & Investments Commission this month said it investigated the stock transactions and Myer’s offer and judged there wasn’t enough evidence to take action. David Jones this week announced the resignations of Mason and the two directors from the board.

All told, Australia’s second-largest listed department store stands to change half its board. That’s after Chief Executive Officer Paul Zahra said in October he’ll leave for personal reasons once his successor is found.

Renewed Bid?

The arrival of new directors at David Jones probably increases the chance of a deal with Myer or a takeover by another suitor, said Simon Marais, managing director of Allan Gray Australia Pty. The firm is David Jones’s fifth-largest shareholder, according to data compiled by Bloomberg.

“We will certainly urge the board to look at a reasonable bid and ask shareholders whether they support a bid,” Marais wrote in an e-mail.

In Myer’s position, “I’d be waiting for the new board and then I’d be coming straight back,” said Rivkin at Rivkin Securities.

Myer, which opened in 1900 and now generates more revenue than David Jones, offered 1.06 of its own shares for each David Jones share, according to a copy of the proposal released to the stock exchange last month. Myer said it planned to retain each company’s brand and deliver annual cost savings of more than A$85 million ($77 million) within three years. Goldman Sachs Group Inc. offered to help finance the deal.

David Jones said Jan. 30 it rejected the offer because it didn’t offer sufficient value and said it wasn’t in talks with Myer about such a transaction.

Better Offer

“If that is going to be entertained, there has to be a greater benefit,” said Paul Xiradis, who helps manage about A$10 billion as chief executive officer of Sydney-based Ausbil Dexia Ltd., David Jones’ fourth-largest shareholder. “There needs to be a better offer.”

Myer has more to gain from a merger than David Jones, according to Tim Montague-Jones, a Sydney-based analyst at Morningstar Inc. Myer is more at risk from online competition because its target market is less affluent and more sensitive to price, he said.

“The key benefit David Jones has is that it’s a very credible brand and it’s very differentiated in the niche market,” he said in a phone interview.

Any acquirer would need to offer a premium of 20 percent to 30 percent for the company because of the value of its real estate in central Sydney and Melbourne, Montague-Jones said.

Land Grab

David Jones’s fully owned properties might even draw private-equity acquirers for the whole company, analysts have said.

The real estate “may be attractive to a wider range of potential suitors,” according to a Jan. 31 report by Macquarie. Myer’s proposal “may bring other potential bidders out of the woodwork.”

Cushman & Wakefield estimated David Jones properties in central Sydney and Melbourne to be worth A$612 million, the equivalent of A$1.15 a share, David Jones said when it announced full-year results on Sept. 25. The company said last week that it plans to develop a Sydney property.

David Jones stock, which reached A$5.91 in November 2009, closed yesterday at A$3.12. That left it trading at 0.87 times this year’s projected sales, less than the 1.08 median among more than two dozen Australian retailers valued at more than $100 million, according to data compiled by Bloomberg. Myer trades at an even lower multiple of 0.48, the data show.

Today, David Jones rose 0.6 percent to A$3.14.

Myer Benefit

Myer shareholders would benefit from a takeover of David Jones, even if the company paid a 30 percent premium, Michael Simotas, a Sydney-based analyst at Deutsche Bank, said in a Jan. 31 report. That’s assuming the merged company commands a higher price-earnings multiple than Myer currently does, he said. Myer now trades at 13 times this year’s estimated net income, while David Jones trades at 19 times.

Australia’s competition regulator may not necessarily clear a merger of Myer and David Jones, said Andrew McLennan, an analyst at Commonwealth Bank of Australia. It may depend on how the watchdog defines the market, he said.

If the regulator “just looks at it from department store competition, there’s no chance,” he said. “But that would be strange because they’re competing against specialty and online retailers.”

The regulator this week said it hasn’t formed a view on a possible merger of David Jones and Myer.

David Jones said in November its Internet store offers more than 100,000 product lines and the average online purchase is three times bigger than a typical sale inside a store.

David Jones may be able to carve out a market in Asia as a premium brand and command a higher bid, said Montague-Jones at Morningstar.

“It does make sense, if there is any sort of deal, that there should be a premium paid for David Jones,” he said.

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