The emergence of Solomon Lew on the David Jones register will unsettle South Africa’s Woolworths Ltd, which may have been the motivation for the buying.
David Jones disclosed today that, in the course of its regular monitoring of its register, it had discovered that Lew’s SL Nominees Pty Ltd had a relevant interest in 3.5 million of its shares, or about 0.65 per cent of its capital.
It didn’t say when the shares had been acquired, although the obvious assumption is that the purchases are recent and presumably after Woolworths announced its $4 a share, $2.2 billion, scheme of arrangement takeover bid for the department store group.
At its current level the holding, if it were anyone but Lew, would be meaningless.
Unlike a conventional offer with a 90 per cent threshold for compulsory acquisition, where a blocking stake of perhaps seven or eight per cent would be sufficient to prevent a bidder gaining 100 per cent ownership, a scheme requires the support of only 75 per cent of the shares voted at the scheme meeting.
History would suggest that anyone seeking to defeat a scheme probably needs around 15 per cent of the target company’s capital, if not more. A 15 per cent stake in David Jones would, at the levels at which David Jones shares have traded since the Woolworths offer emerged, cost about $320 million.
Lew’s Premier Investments does have about $220m or so of net cash as well as an investment in Breville Group worth more than $300m that could be cashed out, so he has the resources to fund a blocking stake and more. He isn’t, however, known for paying over-the-odds for assets, and at $4 a share or thereabouts David Jones isn’t cheap.
Given that Lew’s presence on the register has been flushed out, it would almost certainly cost him more than $4 a share to build a strategic stake and that price would be the reference point for any future takeover activity involving David Jones. David Jones shares traded a few cents above Woolworths’ offer price in response to the disclosure of Lew’s shareholding.
David Jones’ independent expert valued the company at between $3.73 and $4.14 a share but the upper end of that range incorporates some of the value of the synergies Woolworths believes it can extract from leveraging its buying clout and introducing its store brand strategies to David Jones.
Lew’s acquisition of the shares doesn’t look like a share trading exercise. David Jones has traded only a few cents below the offer price since the bid was announced and transaction costs would wipe out any profit from accepting the Woolworths bid.
Woolworths and Lew do have a history. In 1998, when Woolworths bid for Country Road, Lew didn’t accept the offer and today still holds just under 12 per cent of the company and remains an aggressive critic of its management despite Country Road’s significantly improved performance.
If he were to keep buying David Jones shares his immediate intentions would become very clear -- he would be out to defeat the scheme and end Woolworths’ ambitions.
Lew’s Premier Investments has former David Jones chief Mark McInnes at the helm of its substantial portfolio of retail businesses and the team McInnes has assembled within Premier Retail includes several former senior David Jones executives -- to the point that it has been referred to as David Jones management in exile.
If he could blow up the Woolworths bid, the David Jones share price would deflate and Lew, assuming he had accumulated a strategic stake, could choose when and how to pursue a larger role.
This isn’t the first time Lew has held David Jones shares. He had a stake back in the early 1980s -- as he did in a number of department store groups at the time -- but sold out and, in 1983, then bought the Smorgon family’s shareholding of about 10 per cent in The Myer Emporium that was the initial source of the bulk of the wealth he has today.
Given the testy relationship between Lew and Woolworths it is conceivable that he is simply indulging himself by causing the South African group some anxiety. So far he has outlaid less than $14 million and his downside is underwritten by the existence of the offer, so it isn’t costing him anything to tweak Woolworths’ nose.
If he were to keep buying, of course, the game would be on and the ultimate fate of David Jones would be an open question.