Floating Myer's boat

It is a measure of just how much progress the private equity team that has spent the past three years rehabilitating – some would say saving – Myer Group has made that they are now flagging the potential for an initial public offering before the end of this year.

It is also a reflection on the surprisingly emphatic rebound in the share market that the TPG-led consortium is prepared to consider a float nearly a year ahead of the completion of the turnaround phase of its overhaul of the run-down group.

It is the combination of the group being well ahead of its own schedule in the restoration of Myer and the strength of the market that has caused TPG and its partners to consider cashing out some of their investment in Myer.

If they go ahead, the Myer acquisition will go down as one of the great purchases and business turnarounds in this market.

When they bought Myer from Coles three years ago for $1.4 billion the department store group had $3 billion of sales but was generating retail margins of less than two cents in the dollar. Competing with the other brands in the old Coles Myer stable for capital, it had been starved and allowed to run down. It was in desperate need of capital and attention.

The new owners gave themselves 50 months to turn the group around. They called it the "transformation phase", with a scheduled completion of around July next year before shifting into growth mode and a focus on store expansions and driving sales growth.

The critical metric for that first phase was achieving a retail margin of seven cents in the dollar, the level at which hurdles for new investment would be achieved. The old Myer had stagnated because its margins were too low to justify investment.

Today, in announcing that Myer would conduct a review to consider an IPO, possibly in the last quarter of this year, the group said it had achieved a margin of more than seven cents in the dollar for the year to July. While there are still some growth phase projects left to be completed, including the complete rebuilding of the key Bourke Street site, that milestone was the critical one.

The other pre-condition for a float – or a trade sale – was market conditions. A float was out of the question only a few months ago. However, TPG apparently was staggered by the ease with which Asciano (over which it had designs) was able to raise more than $2 billion from the market. A recent visit by several of TPG's US executives confirmed the appetite for a float of Myer.

The extraordinary amounts of capital raised in this market – more than $90 billion last financial year – and the institutional appetite for new listings with growth potential makes the prospect of a Myer float that extracts a fair value for the vendors feasible. It has been a long time since the last sizeable float in this market and Myer has the extra sizzle of being such a prominent brand.

The acquisition of Myer by TPG, the Myer family and key executives has proved astonishingly lucrative. A successful float would deliver enormous gains to those who backed the turnaround.

The consortium paid $1.4 billion for Myer – $428 million of equity and just over $1 billion of debt – but promptly sold the flagship Bourke Street to Colonial First State and the Myer family and released $605 million of cash.

With the $160 million raised from the 'history making clearance sale' that emptied Myer warehouses all over Melbourne of dead stock, they were able to extract $560 million of cash from the group – $132 million more than they had invested – within 12 months.

A margin of more than seven cents in the dollar would imply earnings before interest and tax for Myer of around $220 million. There are analysts who have forecast something closer to $230 million.

If David Jones' valuation were used as a reference point, and some allowance were made for the reality that Myer still has considerable upside left from the incomplete turnaround measures, that would suggest an enterprise value for Myer of $2 billion to $2.2 billion. With debt of around $700 million the private equity players, if they cashed out completely, could walk away with as much as $1.5 billion of gross profit on top of the $132 million already realised.

With the announcement that it was considering a float, Myer also announced that its executive chairman, Bill Wavish, was stepping down and would be succeeded by former Just Group managing director and Myer consulting director Howard McDonald.

Wavish and chief executive Bernie Brookes, both ex-Woolworths, have provided the retail leadership and energy for the turnaround, but Wavish has decided that committing to several years at least as chairman of a public company wasn't something he wanted to do at this point in his life.

McDonald, who has been intimately involved in devising Myer's retail strategies and the complex brand 'architecture' it has developed to segment its offerings, brings public company and IPO experience to the role.