Woolworths Pays Up for Chain to Get David Jones: Real M&A

Woolworths Holdings Ltd. is paying a record valuation for Australian clothing chain Country Road Ltd. just to get its hands on the real prize: department-store operator David Jones Ltd.

The South African retailer is offering billionaire Solomon Lew A$17 a share for his 12 percent stake in Country Road, valuing the company at 21 times earnings before interest, taxes, depreciation and amortization. That’s the highest profit multiple offered in any Australian retail takeover, according to data compiled by Bloomberg. The proposal has one key condition: Lew only gets the deal if he doesn’t block Woolworths’ separate $2 billion bid for Sydney-based David Jones and its chain of 38 department stores across the country.

Lew this month became the largest investor in David Jones, giving him the potential to bar such a deal. For Woolworths, buying David Jones would increase its presence in Australia and make it more competitive with fast-fashion operators such as Inditex SA’s Zara and Hennes & Mauritz AB. While Lew rejected an offer for his Country Road stake from Woolworths in 1997, this proposal is more than eight times higher. Shares of David Jones climbed yesterday, indicating traders are betting Lew will stand by and let the deal close.

“This was a shrewd move on Lew’s part, it’s given him leverage and he’s used that to get a better price for Country Road,” Norman Mackechnie, a fund manager at Momentum Asset Management in Johannesburg, said by phone. “David Jones is an opportunity for Woolworths when retailers in South Africa are facing slowing growth. It’s a pretty full price.”

Momentum Asset Management owns Woolworths shares.

Woolworths Bid

Woolworths agreed to buy David Jones for A$4 a share on April 9, and the Sydney-based company’s shareholders are due to vote on the deal July 14. The proposal needs at least 75 percent of votes cast to be approved.

Lew recently bought about 9.9 percent of David Jones, according to a June 18 filing from his investment vehicle, Australian Retail Investments Pty. Minority holdings can turn into blocking stakes because so few individual investors go to shareholder meetings, Dean Paatsch, co-founder of shareholder rights group Ownership Matters, said by phone from Melbourne.

While shares of David Jones traded as low as A$3.79 this month on concern Lew may block the deal, they climbed 4 percent to A$3.94 yesterday after Woolworths offered to buy Lew’s shares and other remaining minority stakes in Country Road. The stock was unchanged in Sydney trading today, while Woolworths fell 0.7 percent to 76.84 rand at 12:25 p.m. in Johannesburg.

‘Appease Him’

At 21 times Ebitda, Woolworths’ proposal for Country Road represents the highest valuation for any completed or pending deal for an Australian retailer on record, data compiled by Bloomberg show. It’s also more than twice the median profit multiple of 9 for those takeovers. Woolworths’ A$17-a-share bid is 31 percent higher than Country Road’s average price in the 20 days before it announced the offer.

“They must feel like this will appease him,” John Maysles, an event-driven analyst at Elevation LLC in Los Angeles, said in an e-mail. “It seems like an offer of good faith.”

A Sydney-based spokeswoman for Lew declined to comment on how he would respond to Woolworths’ proposals. A representative for Country Road declined to comment, while a representative for Woolworths said that there has been no agreement with Lew regarding this offer, which is now open for all minority shareholders to consider.

Lew Response

Woolworths, which isn’t related to the Australian supermarket chain that goes by the name Woolworths Ltd., took control of Country Road in 1997, offering A$2 for the Country Road shares it didn’t already own. Lew’s Australian Retail Investments rejected the bid and raised its own stake, preventing Woolworths from taking over the entire company.

Even though this proposal values Lew’s Country Road shares at a high level, he hasn’t said he’ll accept it nor the one for David Jones. That might spook investors trying to gauge whether the deals will go through, said Paul Cowan, director of special situations at Religare Capital Markets in Melbourne.

“The market may be a little nervous that there is no statement of support from Lew,” Cowan said. “The silence is deafening.”

Still, Woolworths probably wouldn’t have bid A$17 for each of the remaining Country Road shares unless it expected Lew to accept the offer, he said.

“My suspicion is that Solomon Lew will abstain from voting his stake at the David Jones shareholder meeting, allowing the transaction to be approved,” he said.