Woolworths Holdings boss Ian Moir has defended the $2.15 billion price the South African company has offered for department store group David Jones, saying he was not interested in its cheaper rival Myer.
Speaking to analysts in South Africa, Mr Moir said the company’s offer of $4 a share was just 25 per cent above Monday’s closing share price and so was not an unusually high premium to pay for control.
“You get what you pay for -- we didn’t want Myer, we knew we could get it for less but we didn't want it ... we paid a higher price for a bigger opportunity and the multiple looks steep, but if we can deliver $130 million to the bottom line the return to our shareholders will be a rich one, well above our cost of capital,” he said.
Myer had a market value of $1.34bn at yesterday’s closing price of $2.29 a share, while DJs closed at $3.93 -- a price that market watchers said indicated little expectation of a higher bid emerging.
Priced at 24 times market expectations for DJs’ full-year earnings, one fund manager said only the world’s largest retailers could afford to make a higher offer.
“It would have to be a global player like Marks & Spencer or Nordstrom, but why would they at this price?” said the fund manager, who requested anonymity.
Another investment manager said Myer, which was trading at about 12 times forecast earnings, could also attract takeover attention now but conceded “the share price certainly doesn’t suggest the market is expecting that”.
Mr Moir said he would waste no time introducing his company’s in-house brands to David Jones, aiming to ramp up private label sales from 3 per cent to 20 per cent in as little as two years.
Woolworths Holdings -- which has no connection to Australia’s Woolworths -- has already gone through all of DJs’ stores and worked out what brands it will pull out and what it will introduce, with its own Re: and Studio. W likely to be first off the rank, and a focus on women’s and children’s clothing.
“I see us building up private label of two to three years, and we will build it up in some areas quicker than others,” he said.
Unlike DJs’ rival department store Myer, which has drafted in prestigious fashion designers to create in-house brands, Woolworths Holdings’ private label brands are pitched mainly at the middle market.
And while Mr Moir has repeatedly asserted he wants to retain DJs’ position as a high-class retailer, he indicated it would no longer seek to be a “house of exclusive brands”.
“Competing with Myer on who can get the most international and domestic labels in and who can get them exclusively -- they have kind of lost sight of the customers ... private label will make it far more accessible,” he said.
Mr Moir said the shift towards private label would contribute the bulk of the $130 million boost to annual profit the company is forecasting it will generate within five years of ownership.
He stressed the profit forecast, which means DJs’ bottom line will more than double from its expected level of $98m this financial year, was not predicated on sales growth, increased market share or new store openings.
“This is about margin building,” he said.
DJs would also stock a broader range of merchandise from Country Road, the Australian fashion retailer in which Woolworths Holdings has an 88 per cent stake. Mr Moir said he didn’t expect Myer, which also stocks Country Road, would drop the brand as it was a strong sales generator. “I wouldn’t see Myer cutting off its nose to spite its face,” he said.
A Myer spokeswoman said it was too soon to comment on the impact of the proposed takeover, which is subject to approval from both Woolworths and David Jones shareholders, as well as a capital raising whose details will not be revealed until next month.
Mr Moir said the company will get “down and dirty” with American Express over their DJs-branded credit card, which left a $13m hole in DJs’ first-half earnings after the expiry of a revenue prop-up agreement.
Mr Moir said it was “ridiculous” that only 20 per cent of sales were being made on the card and the company needed to make better use of customer relationship data.
Mr Moir also said while it was “nice to have $600m of premium real estate in your back pocket” it was not necessary to make any deal on DJs’ wholly-owned central Sydney and Melbourne stores to either fund the acquisition or deliver the forecast earnings uplift.