The offer DJs shareholders couldn't refuse

The rather tortuous progress of the $2.2 billion bid by South Africa’s Woolworths for David Jones has ended with the right outcome for David Jones shareholders and a $200 million-plus cash bonanza for a very astute Solomon Lew.

Whether it is the final outcome of the saga may rest with the Australian Securities and Investment Commission, which has flagged the possibility that it may still raise objections to the outcome of today’s shareholder meeting when the scheme of arrangement returns to the Federal Court for final approval later this week.

ASIC is concerned that Lew may have received a 'collateral benefit' in the form of an uncommercially big profit on his 11.8 per cent shareholding in the Woolworths-controlled Country Road by threatening to use his 9.9 per cent shareholding in David Jones to block the scheme.

The resounding nature of the shareholder approval -- nearly 97 per cent of the votes cast at the meeting were in favour of approving the scheme, along with nearly 90 per cent of the shareholders who voted -- probably diminishes the prospect of ASIC intervention.

As the Federal Court’s Justice Kathleen Farrell said at an earlier hearing this month it was unlikely that David Jones shareholders would vote against the bid even if Lew were going to receive a collateral benefit. She’s been proven very right.

The $4 a share that Woolworths offered for David Jones is a big price and one that would appear to rely, from Woolworths’ perspective, on its ability to create value by extracting the $130 million a year of synergies it believes it can achieve by bringing its business model and sourcing next to David Jones.

In other words it is backing itself to create value that wouldn’t be available to an independent David Jones and its shareholders, who might never have seen a share price with a $4 in front of it if they rejected the offer.

The scale of the 'for' vote, from shareholders well aware that Lew is going to get a windfall profit on his Country Road shareholding, underscores how irrelevant they believe the collateral benefits issue is to their own interests.

The price of success for Woolworths has been high, but defensible. It is backing itself to be able to justify the high price for David Jones through the execution of its strategies while the benefits of 100 per cent ownership of Country Road would be amplified by its ownership of David Jones.

Given the significant improvement in Country Road’s performance and those benefits, while Woolworths has been forced to pay a very big premium to prise Lew out of a shareholding he has held since 1997 it can rationalise it. In any case, the premium applies to only 12.12 per cent of Country Road’s capital.

Lew, assuming he does accept the offer for Country Road, has played his hand perfectly. He accumulated just under 10 per cent of David Jones at a cost of around $200m after Woolworths launched its offer. There was also lots of speculation, which may or may not have been founded in reality, that he had his foot on another 5 per cent or so via derivative contracts.

Without saying a word in public, or having any meaningful contact with Woolworths in private -- he and his advisers would have known that there couldn’t be any contact or understanding that involved the way he would vote his David Jones shares or they would inflame the collateral benefits issue -- he positioned himself as a threat to the success of the bid for David Jones, which needed the approval of 75 per cent of the shares voted at the meeting.

We’ll probably never know if he would have carried through with that threat and left himself with a minority shareholding in David Jones, had Woolworths not made its bid for Country Road (which would only proceed if its bid for David Jones was approved) and, in effect, created a $200 million-plus inducement for him to allow the bid for David Jones to succeed. It appears Lew abstained from voting at today’s meeting.

Today’s vote means that Lew will at worst break-even on his sortie onto the David Jones register or perhaps exit with a small profit. If he does accept the offer for Country Road, he will extract about $213m from a shareholding that originally cost him about $20m.

There’s already speculation about what he might do with the big lump of capital his private companies should receive, with some touting a bid for Myer. Lew’s listed Premier Investments has more than $200m of net cash as well as a shareholding in Breville with similar value, so he has the capacity to do something meaningful if he wants to.

The David Jones/Country Road play was, however, opportunistic. The bid for David Jones gave him the chance to create a very profitable exit from the otherwise stranded Country Road shareholding, and therefore it isn’t inevitable that he will redeploy the capital he has extricated any time soon.