Any doubts about the seriousness of Solomon Lew’s intentions, or the magnitude of the threat he poses to South African retailer Woolworths’ ambitions, were dispelled today when he formally disclosed that he now owns almost 10 per cent of David Jones.
With speculation swirling that he may also have a hold on a further 5 per cent of David Jones via derivative contracts, Lew may already be in a position to block Woolworths’ $2.2 billion agreed bid for the department store group.
The bid is to be executed via a scheme of arrangement, where the threshold for approval is 75 per cent of the shares voted at the shareholders’ meeting called to vote on the scheme.
Given that in previous scheme meetings there have been significant proportions of shares that for whatever reason aren’t voted, history would suggest that a 15 per cent stake would be sufficient to defeat the scheme.
Lew’s own history would suggest that he hasn’t invested more than $200 million just to frustrate the South Africans, with whom he has had a long and acrimonious relationship. In 1998 Woolworths bid for Country Road and gained control of it, but Lew still holds almost 12 per cent of that group and has been a constant critic of its management and owner.
Lew has had a lifelong fascination with department store retailers. At various times he on the registers of all the major department store groups (including David Jones) in the 1980s before he bought the strategic stake in the Myer Emporium in 1983 that, when it was subsequently rolled into the merger with Coles in 1985, turned him into a billionaire.
Within his successful Premier Retail group, headed by former David Jones chief executive Mark McInnes, Lew has assembled a high-power group of retail executives, including a core of former senior David Jones executives. In the past, that has generated speculation that he had his own designs on David Jones.
The emergence of Woolworths with a fully-priced $4 a share offer that appeared to capitalise a significant proportion of the substantial synergies Woolworths expects to create if it owns David Jones had appeared to end any prospect of Lew entering the fray. He’s not known for over-paying for businesses and $4 a share or more for David Jones would be a very expensive play.
But if he is able to defeat the scheme at the meeting of David Jones shareholders on June 30, Woolworths will be back to square one; the David Jones share price will inevitably fall back; and he will still have a strategic stake in the big retailer.
One option would be to simply sit on that holding and wait for the share price and price expectations to deflate before either creeping his way towards control or eventually making a bid at a price he can justify to himself. His Premier Investments has about $220m of net cash and a $300m or so investment in Breville Group that it could cash out if necessary.
It is interesting that it hasn’t been Premier buying the David Jones shares, but Lew’s private companies. The stake in Country Road is also owned by Lew himself rather than the listed Premier.
One of the theories that may explain Lew’s David Jones play is that he is seeking leverage over Woolworths in order to force the South Africans to pay him an exorbitant price for his Country Road shares.
While that might explain why he has used his private companies to acquire the David Jones holding, that’s more likely to be his fall-back option than his primary objective.
He’s paid more than $3.90 a share for the David Jones stake and would face the prospect of a very large loss if Woolworths decided to stare him down, maintain the status quo at Country Road and take its chances at the meeting.
A more interesting, albeit expensive, option (Country Road has a market capitalisation of about $1.4 billion) would be for Lew to use the leverage to try to convince Woolworths to sell him Country Road on reasonable terms.
Country Road would appear a neat fit with the portfolio of proprietary brands within Premier Retail, although it is also a key brand within Woolworths’ strategy of significantly lifting the proportion of store-owned brands within David Jones.
If no deal between Woolworths and Lew is struck between now and June 30 -- and Lew does vote down the Woolworths’ scheme -- it would become clearer that he has his eye on the big prize, David Jones itself. However, it is conceivable that Woolworths could have another tilt at the group in future after coming to some kind of arrangement with Lew.
At the moment, in a typical Lew play, he has created a number of options flowing from the leverage the stake in David Jones gives him over Woolworths and, indeed, David Jones itself.
The immediate window within which most of them can be exercised, however, is brief and narrowing every day. Once the scheme meeting is over, whatever the outcome, some of that leverage will be lost.