Brookes fans the Myer merger flame

Myer's reappointment of Bernie Brookes as chief executive suggests its merger proposal isn't dead yet, and may even find a receptive audience in a reshuffled DJs board and unhappy institutional investors.

The reappointment of Bernie Brookes as Myer’s chief executive is a very pointed signal to David Jones and the market that Myer’s ambition of merging with its department store rival hasn’t been extinguished by the initial rejection of its ‘merger of equals’ proposal.

Brookes had been scheduled to retire by August, with Myer conducting an international search for his successor. That plan, however, had to be revisited after Myer decided to approach David Jones last year with its proposed nil-premium merger.

The concept was rejected out-of-hand virtually the moment it was received. However, when it was disclosed earlier this year, it added to the intense pressure on the David Jones board that had been ignited when it emerged that two directors had bought shares in the company just ahead of a quarterly sales announcement that moved the market.

The disclosures exacerbated the behind-the-scenes tensions between David Jones CEO Paul Zahra and his board. Zahra had announced his intention to resign last October, citing exhaustion. That announcement, coupled with the share-trading revelations, ignited criticism of the board by institutions regarded as supporters of Zahra and his strategies.

The board cracked this month, with chairman Peter Mason and the two directors engaged in the share trading, Steve Vamos and Leigh Clapham, announcing their resignations this month.

The gutting of the board has caused Zahra to reconsider his position – and Myer to reappoint Brookes and re-present its proposal to David Jones’ board.

With half its target’s board gone, a question mark over Zahra’s status and very unhappy shareholders, Myer obviously believes its merger proposal isn’t dead.

Today, Myer chairman Paul McClintock wrote to his retiring David Jones counterpart, Peter Mason, urging him to reconsider. He said the reappointment of Brookes was to provide clarity about the leadership of Myer and an 'option' for the CEO role of a merged group. Mason will leave the David Jones board within three months.

A reconstructed board might see the proposal differently. Myer says its plan would generate synergies of $85 million a year, which Myer estimates represents more than $900 million of shareholder value. At the very least, whether or not the proposal is ultimately rejected, a new board might be prepared to discuss it, explore the potential and try to negotiate different terms.

Myer would also be well aware that there are some David Jones institutional shareholders who would like the concept to be explored further, given the question mark over the future of department stores; the challenges created by both new international competitors; and the increasing threat posed by the big offshore online retailers.

It would, however, be very difficult for Myer to prosecute a merger or takeover of David Jones with either a retiring CEO or a new CEO who might not be either up-to-speed on the local department store environment, or not as committed to a transforming transaction at the outset of his tenure.

That would have led inescapably to the conclusion that Brookes had to stay, at least until it became obvious that the merger concept was conclusively dead and buried. If the merger aspiration is to be kept alive, Myer also needed to be able to reassure the market that the merged group would be led, and the integration executed, by a CEO investors knew and trusted.

Myer’s announcement of Brookes’ extension was therefore framed with the merger in mind. It was studded with reference to the proposal; it devoted more space to the merger than to Brookes’ reappointment. Brookes himself made it clear that, if a merger could be agreed, he would commit himself to presenting as the potential CEO.

Myer has said the question of the CEO of a merged group would, along with board and senior management roles, be open for discussion and mutual agreement. However, there is little doubt that the market would nominate and endorse Brookes for that role, given his demonstrated ability to execute on the costs and supply chain efficiencies that are at the core of Myer’s estimated merger synergies.

Brookes’ new contract is an ‘open term’ document. This gives Myer and Brookes the flexibility to return to Plan A (a new CEO) should it fail to get David Jones’ engagement and support for the merger.

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