Spurned Myer shows its hand

The rejected suitor reveals the substantial amount of work it put into a planned $3 billion merger of department store equals with David Jones.

In a highly unusual move, Myer Holdings has decided to publish in full its snubbed takeover proposal to upmarket rival David Jones – right down to the offer of debt financing from its financial advisers, Goldman Sachs.

The proposal, dated October 28 and signed by Myer Chairman Paul McClintock, still carries the “strictly confidential” stamp in the top corner. The deal was formally rejected by DJs on November 27, according to Myer.

As the takeover proposal implies, the offer does not come from a position of strength. Both department stores are desperately trying to win back customers who have found more convenient offerings elsewhere. The entry of UK department store par excellence Marks & Spencer will certainly add to that pressure.

What Myer’s proposal reveals is that, while incomplete, a large amount of homework was done on a potential merger. The letter to DJs chairman Peter Mason is replete with detailed financials that should give analysts crunching the numbers plenty of grist.

The proposal shows that Myer identified cost synergies of some $390 million, or around 27 per cent of David Jones’ current market capitalisation. It suggests annual savings of $85 million, driven by a single corporate function, IT, marketing and supply chain changes including direct sourcing.

Myer argued that its offer would give DJs a multiple of 16.5 times 2014 earnings, above the implied 12.7 multiple for Myer itself. There was no plan to merge the two iconic brands, or stores.

DataRoom understands that the decision to put out the details of the spurned offer follows the rather dismissive tone of the David Jones statement to the ASX, which said Myer’s proposal was incomplete and had insufficient merit.

Several advisory teams and senior bankers and lawyers worked on the plan, from Goldman Sachs as financial advisor; management consultants Bain & Co; corporate advisor Flagstaff Partners; Allens as competition legal advisor; Clayton Utz as legal advisor; KPMG on tax; Michel Retail as property consultant; and PR firm John Connolly.

“We have completed significant research and analysis on the benefits of this proposal, including the input from leading international experts and advisors,” McClintock said.

So, a substantial amount of effort dismissed out of hand; perhaps persons unknown on one of the multiple teams of consultants felt the offer had not been given due consideration.

Whatever the merits of the proposal, such a potentially complex and sector-transforming plan clearly should have been put before shareholders to enable them to decide. Both Myer and David Jones are facing the same challenges, albeit from slightly different positions in the market: a shift in consumer preferences to specialist stores and online offerings, with an infinitely larger and oftentimes cheaper range than the lumbering domestic department stores can provide.

The proposal also came at a unique moment in time for the boards of both retailers, as they are each searching for new CEOs to replace Bernie Brooks and Paul Zahra. (In the case of David Jones, there may also be a few vacancies on the board if pressure on those directors who bought shares just one day after receipt of the Myer proposal does not ease up, even after ASIC found insufficient evidence to pursue a case.)

So one of the biggest hurdles to many complex financial mergers of equals – deciding which company’s CEO gets to sit in the big chair – would not be an issue in a Myer/DJs tie-up. Myer also stated that the composition of a merged board would be agreed by the two current boards.

And as Stephen Bartholomeusz noted, a nil premium all-scrip offer in such situations is not controversial and is the most attractive way to create the combination because neither set of shareholders pays a premium to the other (Shoppers would stampede DJs doors, January 31).

Myer said on Friday that the release of the entire proposal was in the interests of keeping the market fully informed. No doubt the shareholders of both companies for a period of one month late last year would have wished for the same.