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Takeover offer highlights DJs' break-up value

Investors in the department store chain David Jones didn't know whether to laugh, cry or get even at the board's handling of an unsolicited takeover approach - then withdrawal - by the obscure entity EB Private Equity.

Investors in the department store chain David Jones didn't know whether to laugh, cry or get even at the board's handling of an unsolicited takeover approach - then withdrawal - by the obscure entity EB Private Equity.

The takeover offer, which was almost Seinfeldian in that it was a takeover about nothing, has been described as a "farce" in an afternoon note from Goldman Sachs. Others used more colourful language to describe what will go down as one of the more bizarre takeover offers and withdrawals.

For some, the David Jones announcement on Friday of a takeover proposal has made them a lot of money as shares jumped 17 per cent at one stage. For others, it is a case of feeling short changed. For this reason the regulators and class action lawyers will be trawling through the timeline of events that led up to Friday's and Monday's announcements, including a trading halt, to ensure the company has not accidentally misled the market through unintended negligence by not issuing a strong enough caution.

There is also a strong case for the Australian Securities and Investments Commission to search the David Jones share registry to ascertain whether or not any unusual trading has taken place since EB Private Equity first posted a letter to the David Jones chairman, Bob Savage, dated May 22, which he received on May 28. As part of its job to ensure market integrity, the corporate regulator will need to rule out the present market speculation that this was an elaborate case of window dressing by some mischievous traders on the last day of trading for the 2011-12 financial year.

If David Jones didn't have enough on its plate battling a flawed online strategy, shrinking margins and a fragmenting customer base, it will now suffer additional credibility issues.

The incident raises the question whether the board and its advisers could have handled themselves better when it notified shareholders that it had received an unsolicited takeover approach. The question that class action lawyers will look at is whether the board should have made a stronger warning and released the letters it had received from EB Private Equity to ensure full market transparency.

The is no doubt the company issued cautions to shareholders on Friday but whether that is enough to keep the class action lawyers at bay, time will tell. The brutal reality is Savage received a letter on May 28 from EB Private Equity outlining its intentions. In that letter it said: "Our formal offer for these assets and stocks in total is AU$1.52 billion." It said it was an unconditional offer subject to due diligence and the acceptance of this offer by the David Jones board within two weeks of the date of the letter. It was signed John M Edgar, chairman of EB Private Equity.

The ASX statement released by the board on Friday morning was vague and carried several qualifications but it wasn't enough to keep the share price from rocketing 17 per cent before closing 14 per cent higher. In its initial statement to the ASX, David Jones didn't release the name of the suitor, nor did it reveal it had received an initial approach on May 28 or a second approach last Wednesday. Instead it said it was a non-incorporated British entity of which no usual public information was available. "The directors do not believe they currently have relevant information to enable them to qualify or value the approach but, should this change, will advise the market accordingly." It said it recommended that shareholders treat any related market comment cautiously.

ASX queried David Jones on Friday to ensure it was meeting its listing rule obligations, including why it didn't reveal the identity of the suitor if it knew who it was. The company said it was meeting its obligations and said it undertook inquiries in relation to publicly available information on EB Private Equity and was unable to obtain anything meaningful. "This remains the case today," it said.

It was only after a British blog site reported the identity of the suitor and the offer price that David Jones filed another note to shareholders. By this stage there were lots of rumours in the market that it might be a hoax.

The board has sat on this knowledge for more than a month. What the media revealed at the weekend was that EB Private Equity's domain name was registered to an address in Newcastle, and a search of Google maps showed only mail boxes at that address.

Given so much mystery around EB Private Equity, questions will be raised as to whether David Jones should have gone into a trading halt on Friday rather than leaving it until Monday, when the share price started falling on fears the offer would evaporate.

It was during the trading halt that investors were informed that EB Private Equity had decided to withdraw its offer because of the publicity it had received. Not surprisingly, the stock closed down 10 per cent after the trading halt was lifted.

It is a sad and embarrassing tale for David Jones but what it has done is focus the market on the break-up value of David Jones as a property play. David Jones has some good properties on its books at an estimated $450 million. Some suggest these properties could be worth $800 million. Even though John Edgar looks to have been a big talker with no backing, it has at least put the spotlight on the value of David Jones in the hands of private equity or a trade buyer who can sell the property and lease it back without having the headache of a big capital gains tax bill.

David Jones will be one of many retailers that will face takeover scrutiny in the next few months. Others believed to be in the sights of predators include Billabong and Pacific Brands. Most retailers in Australia have missed the boat in terms of embracing online competition and are now suffering the consequences. Overseas competitors and private equity operators who need to spend some of their committed funds this year are on the prowl.

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