That David Jones’ independent expert has endorsed the $2.2 billion bid by South Africa’s Woolworths won’t surprise anyone. That the top end of its range of value for David Jones shares is above the offer price might.
While the outer limit of the valuation range of $3.73 to $4.14 a share is only 14 cents, or $75 million, above the offer price and valuation, the $4 a share bid is generally seen as a very full price for a department store retailer battling structural changes in its market that could ultimately threaten its existence.
Woolworths’ offer had been seen to incorporate an element of the value of the $130 million a year of synergies it anticipates from the acquisition.
We’ll have to wait for the release of the full report to understand how Grant Samuel arrived at its conclusions on value and the extent to which it sees the flood of new foreign competitors, the impact of online retailing and the deteriorating external environment impacting David Jones -- and by implication its arch rival Myer.
The full report may, therefore, be as relevant (if not more relevant, given that no one disputes the appeal of Woolworths’ offer) to assessments of Myer’s value and prospects as it is to an evaluation of David Jones.
It was those factors and the existential threat they could represent to the two big full-service department store operators in the medium to longer term that prompted Myer, after considerable analysis, to approach David Jones with its ‘’merger of equals’’ proposal last year.
The disclosure of that approach on 30 January (the merger proposal had been put to David Jones last October) pushed the David Jones share price up, before the announcement of the Woolworths’ bid saw it soar about 25 per cent.
As Grant Samuel says, while the 25 per cent premium implied by reference to the share price just ahead of the announcement of the bid is reasonable, the more relevant reference point is the ‘’undisturbed prices’’ – the prices at which the shares were trading before they were ‘’disturbed’’ by the disclosure of Myer’s proposal.
On that basis, the premium is closer to 40 per cent and not just fair and reasonable but generous.
Even if one takes into account the recent improvement in David Jones’ sales performance it is hard to argue with Grant Samuel’s opinion that in the absence of the Woolworths’ offer the group’s share price would trade well below $4. It would probably be closer to $3 than $4.
From the moment the Woolworths’ offer was unveiled it was certain to succeed. Given the price it put on the table the prospects of a rival offer were virtually nil.
Woolworths, which plans a fairly radical shift in David Jones’ business model by shifting the mix of product firmly towards private label offerings, will have to generate a material and structural improvement in the group’s earnings base to justify the price.
It does have its own successful business model and a southern hemisphere supply chain to provide it with the confidence that it can, which has resulted in David Jones shareholders receiving that generous price without being exposed to the risk that the synergies and the value they might create aren’t as sizeable as Woolworths anticipates.
The scheme meeting to vote on the offer is going to be held on June 30. The outcome should be a foregone conclusion.