RetailBiz Special Edition – with Claire Reilly
Today's ASX results are here
DJs CEO Paul Zahra (left) and Myer CEO Bernie Brooks engaged in some Chinese New Year horseplay.
Just 18 months after David Jones was subject to a bizarre takeover bid from a relatively unknown company in the UK, talks of a merger have once again surfaced — this time with department store competitor Myer.
David Jones explained the details of Myer’s merger proposal in a statement released late yesterday after questioning from The Australian Financial Review, the newspaper today revealed. According to the retailer’s statement, David Jones was approached by Myer on 28 October 2013 with a proposal that would see DJs shares acquired by Myer in exchange for shares at the competitor.
The statement described the proposal as “an invitation from Myer on a confidential, conditional, non-binding and indicative basis” and the proposed rate of exchange was 1.06 shares in Myer for each David Jones share. Myer also requested access to perform due diligence on David Jones.
However, as with the acquisition proposal that surfaced 18 months ago, David Jones revealed that the merger was not to be:
"The Board formed the view that the invitation should be rejected shortly after it was received…[and] that the potential transaction did not have sufficient merit for David Jones shareholders.
"The execution and implementation of any such transaction would have substantial commercial, market, business and regulatory risks (including the ACCC review process). It would involve the diversion of company resources over a lengthy period with great uncertainty as to the final outcome and the potential to result in diminution of value of the David Jones business."
For its part, Myer has since revealed details of the merger proposal — which it said would “create a sustainable, more competitive retailer” — and the subsequent rejection by David Jones one month later. According to a statement released by Myer this morning:
"Myer has for some time been reviewing and implementing a range of strategic initiatives to strengthen the company’s competitiveness. As part of this review one option considered was a merger with David Jones and significant analysis was undertaken over an extended period leading to an approach being made."
Myer proposed to continue the Myer and David Jones brands as two “clearly differentiated” department store entities with different merchandise and store operations teams. Together the stores could offer “an enhanced merchandise assortment, brand portfolio, and exclusive and private label offering” — thus appealing to more consumers and offering more choice.
The retailer also highlighted that a merged Myer/David Jones would have generated $5 billion in sales over the last financial year, and $364 million in earnings (EBIT) before “cost synergies” were taken into account; Myer estimated these synergies at $85 million over three years, creating “more than $900 million of value to be shared by Myer and David Jones shareholders”.
As well as thinking of shareholders, Myer said the merged company could deal more efficiently with suppliers, while an enhanced omnichannel offering created by the two companies would be better placed to address the “structural shifts in retail internationally, including consolidation, segment specialisation and the growing impact of online shopping on traditional department store markets”.
The offer was officially declined by David Jones on 27 November 2013.
In an interesting footnote to the confidential merger talks, which were only revealed yesterday (three months after Myer’s first offer), The Australian Financial Review has called into question the move by two David Jones directors to buy shares in the company shortly after the deal was first mooted.
According to The Fin, “[David Jones'] statement does not address the issue of whether two David Jones directors — Leigh Clapham and Steve Vamos — should have been allowed to buy shares after Myer lodged its proposal and before a decision was made to reject the offer”.
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What would a David Jones and Myer merger mean for Australian retail? (analysis/opinion)
Retailers, consumers and business analysts have today had cause to imagine the future of Australian retail landscape without a duopoly of department stores.
Late last night, David Jones confirmed that it received an unsolicited merger offer from Myer in October last year that would have seen the two companies uniting into a single entity (albeit retaining the individual Myer and David Jones brand names and stores).
David Jones rejected the offer, saying it “did not represent sufficient value for…shareholders”. For its part, Myer released a statement this morning standing by its acquisition proposal, believing the merged company would have been able to “more effectively compete in what is now a globally competitive market”.
Reading the statements from both companies, it’s hard to imagine a future where two of Australia’s most well-known retail rivals would ever unite. Older Australians may well remember a day when their allegiance was divided between Grace Bros and David Jones, but Grace Jones? That may be a bit too much for the established retail set. That said, today’s notoriously tough retail climate is a brave new world.
The fact remains, Myer and David Jones are no longer the only kids on the block. The rise of online retail means that the average consumer has more options now when it comes to buying their apparel, appliances, cosmetics or homewares.
Consumers can now go to specialty online retailers for specific needs (be it apparel from ASOS, cosmetics from StrawberryNet or appliances from any number of dedicated omnichannel retailers in Australia and overseas). And if they’re after an established department store name, they now have a greater choice with international retailers such as America’s Saks 5th Avenue and Macy’s offering shipping to Australia. UK giant Mark’s & Spencer has even shown its hand with a bid to enter the Australian market.
Despite the increasingly competitive market, it remains to be seen whether the Australian Competition and Consumer Commission (ACCC) would ever approve a merger between two major players in the Australian retail space.
The ACCC today released a statement saying it was provided with background information when the merger was originally proposed, but because “the transaction was at a preliminary stage and went no further” a formal review was not conducted:
"If a transaction was to occur, the ACCC would conduct a public review.
"The ACCC reviews mergers and acquisitions which have the potential to raise concerns under the Competition and Consumer Act 2010. The CCA prohibits acquisitions that would have the effect, or be likely to have the effect, of substantially lessening competition in a market."
Commenting on the possibility of the ACCC approving such a merger, CIMB retail analyst Daniel Broeren told RetailBiz.com.au it “could happen, but is not likely”:
"I can image however that Myer would claim that the two stores combined only make up a small percentage of the various categories they participate in (for example, Myer and David Jones combined would be less than 10 per cent of the apparel market in Australia). The only category where they may control more than 50 per cent would be in high-end cosmetics."
While he did not see a great risk to the competitive landscape in Australia, he added, “that wouldn’t stop the ACCC preventing it”.
As far as what a chopped and changed Myer Jones could look like, Broeren said it would “result in a much stronger group that would probably take more divergent strategies to avoid crossover (Myer going more down market, DJs moving more upmarket)”.
But for the time being, such a future is only speculative.
With David Jones rejecting the merger offer, Broeren took the view that “the only way Myer could join the companies would be via hostile takeover”.
"If Myer achieved a hostile takeover, it would then need approval by the ACCC. While this may very well be granted, it nonetheless comes with considerable risk. A level of risk that the board would not be able to take in my view. If Myer did successfully acquire DJs in a hostile takeover, paying a 30 per cent to 40 per cent control premium, and subsequently did not receive ACCC approval, it would be forced to divest, destroying significant value and compromising the viability of the business."
In addition, given Bernie Brooks has $26 million in shares and finishes as CEO in August, he would not take this risk unless he had pre-approval from the ACCC.
At this stage I see it unlikely that the Myer’s Board pushes forward down the hostile path. Nonetheless this issue will be on the agenda for some time now, and you never can say never.
For now, the idea of a merged Myer and David Jones is purely speculative. But as Broeren says, you can never say never. Australia is left with two major department stores… for now.
But just like its flashy namesake, ‘Grace Jones’ may never be far from coming back into the spotlight.
Quote of the Day
“At Officeworks, we’re really excited to see where our customers take the Cube 3D Printer as they explore the limitless range of creative, boundary-pushing designs available. We encourage everyone to get involved as it’s never been easier to bring your big ideas to life."
Toby Watson, technology business manager at Officeworks, is excited that Officeworks has become the first traditional retailer in Australia to sell a 3D printer.
Image of the Day
Don has launched a new back-to-school school-lunch themed merchandise cart:
"Don enlisted Creative Instore Solutions’ expertise to design and manufacture its new off-location refrigerated and ambient display in a first for the smallgoods category," the company said. "The semi-permanent solution is instantly recognisable as the Don brand with premium placement and high in-store visibility to evoke theatre that is reminiscent of a street vendor food cart."
Gong Hei Fat Choi!