South Africa’s Woolworths Holdings this week begins the delicate balancing act of convincing its shareholders it has snared a bargain in David Jones without tipping off the shareholders of the company it’s buying.
Woolworths chief Ian Moir says David Jones’ property assets, its wholly owned stores in Sydney and Melbourne CBDs, will be high on the list of positives he presents to his shareholders in a series of presentations this week.
Speaking to The Australian from South Africa, Mr Moir said the initial response from Woolworths’ institutional shareholders was “neutral to positive”, but he believes he can drum up more enthusiasm with the company’s plan to boost net profit by $130 million by replicating its successful private-label strategy, as well as highlighting the value of the DJs property portfolio.
“They trust us -- we’ve got a good track record -- they see the benefits of being in the southern hemisphere and the synergies there, and they’re wanting to hear how we’re going to do,” he said.
“But they take comfort from the fact that we’re not doing anything we haven’t already done and we’re leveraging what we’ve already done in South Africa.”
In recommending acceptance of the Woolworths offer of $4 per share, DJs chairman Gordon Cairns has praised the high multiple it represents, at 24 times expected earnings per share for this financial year.
A 2012 review by consultants Cushman & Wakefield valued DJs’ property at $612m, but Mr Moir said he valued the property portfolio at “$600m to $700m” and noted it made the $2.15 billion Woolworths plans to pay for the company look “more ordinary”.
Stripping out the value of the property portfolio, for which Mr Moir has repeatedly said Woolworths has no plans, the earnings multiple is a more modest 18 times earnings.
Woolworths has been careful not to wave this figure in the faces of DJs shareholders whose approval is needed for the acquisition to proceed.
In recommending acceptance, Mr Cairns said David Jones considered alternative means of delivering value, including realising the property portfolio and continuing to pursue its own strategies, which include increasing its proportion of private-label merchandise -- just as Woolworths plans to do. DJs’ property has featured heavily in presentations in South Africa.
DJs was already exploring options to realise the value of its property before the offer from Woolworths, which has no connection to Australian retailer Woolworths Ltd, and justified its rejection of Myer’s proposed merger of equals partly on the grounds that its rival department store had no property.
DJs shareholders are set to vote on the deal at a meeting to be held in June.
For the vote to pass, DJs will need to explain why it cannot deliver the same $130m profit uplift Woolworths is aiming for despite the strategy being essentially the same, while downplaying the value of a property portfolio its new owners evidently see as a gold mine.
Woolworths Holdings also needs shareholder approval for the deal to proceed -- both by way of a vote on the acquisition planned in June, and financially, with the company planning to fund part of the acquisition with a capital raising.
Shares in Woolworths Holdings are down by 7 per cent since the company announced its takeover plans, with the stock closing at 68.50 rand on Friday.
However, Mr Moir said the company’s biggest shareholder, the $52bn South African Government Employee Pension Fund, was “indicating that they’re happy with what they see, and our other big shareholders are saying the same thing”.
“Everyone wants to understand the debt-equity split and the mechanics of the deal, but there’s no negativity,” he said.
He added that the size and make-up of the debt funding -- part of which will be priced in Australian dollars -- would not be disclosed until the company had secured foreign exchange cover.