DataRoom AM: Department store shopping

DJs’ startling news of a Myer offer will bring it scrutiny, while Shell confirms a downstream sale.

David Jones has shocked investors with an admission it received a merger offer from rival Myer Holdings in October last year. Investment bankers remain hopeful it will lead to a $3 billion tie-up, but there’s little to suggest there will be any further talks.

Elsewhere, Royal Dutch Shell confirms plans to offload Australian assets, ERM Power gets approval to buy Macquarie Generation and the Port of Newcastle receives plenty of interest.

Myer Holdings, David Jones

Just yesterday there were rumours investment bankers were pushing for a merger of Australia’s two iconic department store retailers, though little did we realise there was more depth to the story.

Myer knocked on DJs’ door back in October to assess whether its long-time rival had any inclination to merge.

David Jones, after assessing an all-scrip deal that offered no premium and was essentially a merger of equals, swiftly returned with a curt ‘no thanks’.

"The execution of any such a transaction would have substantial commercial, market, business and regulatory risks including the Australian Consumer and Competition Commission review process," the retailer said.

As we discussed yesterday, the ACCC would likely have significant qualms about green lighting a $3 billion deal between the nation’s largest two department store retailers and it is hard to see how the intense rivals would be able to work together to produce a deal that suited both parties.

Given the challenges confronting both retailers, such talks would likely prove no more than a distraction.

Still, reports yesterday that investment bankers were shuffling around the idea of a merger to fund managers indicates they haven’t given up hope of Myer coming back with a fresh offer.

The October 28 offer from Myer coincidentally came just ahead of controversial share purchases by two David Jones directors. The on-market buys faced criticism as they came just before better-than-expected sales numbers were made public, but more scrutiny can be expected now even though corporate regulator ASIC has concluded its investigation.

Royal Dutch Shell, Woodside Petroleum

Royal Dutch Shell has confirmed the worst kept secret in Australian M&A by announcing it is in discussions to sell its downstream assets in Australia.

As it reported an expected slump in profit and plans to pursue $US15 billion in asset sales over the next two years, the company indicated it was actively pursuing a sale of its local petrol retail and refining assets. A sale depends on the offer it receives, but it appears likely a near-$3 billion deal will go through.

The interested parties are believed to include a Glencore Xstrata-Macquarie Group joint venture and a consortium including giant oil trader Vitrol and the Abu Dhabi Investment Council.

Shell, however, refused to be drawn on a possible sale of its 23.1 per cent shareholding in Woodside Petroleum, a fair sign that something is probably happening behind closed doors.

If Shell did intend to retain its $7.5 billion stake, it would benefit from informing the market. One suspects UBS, which recently released an analyst report highlighting reasons for Shell to sell now, is knocking down the door given it ran Shell’s most recent block trade in Australia – a 10 per cent reduction in its Woodside stake.

That said, Woodside’s share price has scarcely moved since May last year, when Shell indicated the price was too low to sell and has fallen significantly in US dollar terms. New chief executive Ben van Beurden may not worry too much about that as he looks to leave his mark on the firm.

ERM Power, Macquarie Generation

The ACCC has given ERM Power the all-clear to purchase New South Wales' largest generator – Macquarie Generation – should it win the auction currently being held by the state government.

Doubts persist about fellow MacGen suitor AGL Energy receiving similar approval as it waits on a February 5 decision from the regulator.

The date coincides with the final deadline for bids for Macquarie’s two coal-fired power stations, Liddell and Bayswater. The deal could be expected to reap as much as $1.5 billion for state government coffers, though fears on electricity demand growth, or lack thereof, may see bids come in closer to the $1 billion mark.

AGL and ERM are the only two confirmed bidders, but there is an expectation another suitor will throw its hat in the ring.

Port of Newcastle

The $700 million Port of Newcastle is in the sights of Cheung Kong Infrastructure, according to The Australian Financial Review.

Citigroup is believed to be working with the Hong Kong-based Cheung Kong on a deal to buy the NSW state government owned-asset.

Other companies linked to the port include Asciano Ltd, Hastings Funds Management and Deutsche Asset & Wealth Management as well as a suite of Japanese firms. Meanwhile, the AFR believes Credit Suisse is advising ATEC Rail Group on a possible bid as it becomes clear there is no shortage of interest.

First round bids on the asset are due on Friday, with the state government wanting to conclude the sale by May.

Orica

Explosives maker Orica could pursue a $350-$500 million divestment of its chemical business as it carries out a strategic review.

The group, which held its annual general meeting yesterday, admitted its non-mining chemicals business faced stress from local manufacturing woes, which had led it to undertake a closer analysis of where it fits within the business.

A sale was being considered, chief executive Ian Smith mused, along with a change in direction of the business or a reallocation of capital.

Insurance Australia Group

Meanwhile, Insurance Australia Group has lifted the size of its capital raising after receiving high demand from retail shareholders. The group has now raised $1.436 billion, which will largely be directed toward paying off its $1.85 billion purchase of Wesfarmers’ insurance division.

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