Dressed to sell

Like a catwalk model, Myer has been slimmed down and dressed up to parade before investors who have little more than a week left to decide if the department store's vital statistics match the sales hype.

Myer was bought by its current private equity owners, TPG, and its partners in 2006. Since then, costs have been cut, operational improvements have been made and profits restored.

Myer is also one of Australia's best-known retail brands with a history stretching back more than a century and more than 3 million loyal, card-holding customers who are familiar with the merchandise now up for sale.

On the surface, the company looks as good as its public face, Jennifer Hawkins. Not surprisingly, brokers are reporting strong interest in the float by retail investors. Off the record, many analysts suspect there could be blemishes beneath the skilful make-up job.

Not only are the owners opting to cash-in their chips at an opportune moment when the economy and the sharemarket are showing early signs of recovery but they have tied up 17 of the biggest-name investment banks and brokers to handle the sale.

As one cynic put it, they're buying the market to avoid negative comments.

Tyndall portfolio manager Craig Young says the float is taking place at a time when the focus for retailers is moving from cutting costs to growing revenues and increasing floor space.

Myer plans to grow from 65 stores to 80 by 2015. David Jones is also looking at expanding its floor space by between 15 per cent and 25 per cent over four years, while Big W, JB Hi-Fi and others are also expanding.

This will require capital expenditure, increase competition and put pressure on profits.

Consumer spending held up well throughout the financial crisis and the outlook is better than expected, all of which supports the outlook for growth. However, rising interest rates and a lack of further economic stimulus could temper the improved outlook.

The easiest yards are to cut costs and get the business working profitably; it takes longer to get growth up and running, Young says.

The prospectus shows that under the current ownership, Myer's sales revenue fell from $3.289 billion to $3.261 billion between 2007 and 2009 but earnings before interest and tax increased from $165 million to $236 million.

Privately, many retail analysts question whether Myer has cut staff and other costs too much in the drive to restore profits. If so, there is a danger that Myer may lose customers and sales.

When assessing an investment, share analyst Roger Montgomery looks for a great-quality business at a price that represents value for money. While he concedes that Myer is a great business, he thinks the asking price is too high.

Using figures supplied as part of the prospectus, Montgomery values the company at between $2.67 and $2.78 a share, well below the $3.90-$4.90 the owners are asking for.

The NSW state manager of wealth management for Ord Minnett, Danny Dreyfus, says the 20 per cent differential between the top and bottom asking price is wider than is traditional for an initial public offering (IPO), reflecting the current market uncertainty.

That 20 per cent differential is an important issue," he says. "Some investors will decide to take their chances in the secondary market [once the shares have listed].

However, if the float proves popular with mum and dad investors, some professionals may take a decision to buy with a view to selling at a profit soon after listing. In that case, mums and dads could be left holding the baby.

Myer is not offering any discount to retail investors but it is playing to its support base by restricting the offer to Myer employees, members of its Myer One loyalty scheme and existing Myer noteholders as well as clients of participating brokers, including Australia's largest online broker, CommSec.

This is the largest IPO that's come to market [since the global financial crisis]," Dreyfus says. "The market has had seven successive monthly rises and Australia came out of the GFC better than most but there's a question mark about the economy once the fiscal stimulus is turned off.

"Ords feels the retail sector has got a lot of the return to normal consumer behaviour already priced into it, he says, pointing to David Jones's share price, which bottomed at $2.10 in March but was trading about $5.80 last week.

There are also concerns that Myer's private equity owners will be taking the best of the turnaround profits off the table. Montgomery points out none of the $1.9 billion to $2.3 billion cash raised in the issue will be used to grow the business. Up to $119 million will be used to pay costs associated with the float, $315 million to repay debt and the rest is earmarked to buy out the existing owners, TPG and the Myer family, who will sell 80 per cent to 100 per cent of their existing shares.

Chief executive Bernie Brookes and his management team have pledged to retain 83 per cent of their shareholdings, on average, until after the release of next year's profits.

Shares on offer: 479.3m-499.5m

Price range: $3.90-$4.90

Minimum share application: $2000

Retail offer closes: October 23

Pricing and allocation announced: October 30

Trading commences: November 2

Expected dividend yield: 4.3 per cent to 5.3 per cent