Woolworths' investors show support for DJs deal

South Africa's Woolworths needs to convince its own shareholders of the merits of the David Jones deal, and it may be making some progress on that score.

One of Woolworths Holdings’ largest shareholders has tripled its stake in the South African retailer, in a show of confidence for the company’s planned $2.15 billion takeover of department store David Jones.

Coronation Fund Managers yesterday informed Woolworths Holdings — which has no connection to Australian retailer Woolworths Ltd — that it had increased its stake in the company from 1.81 per cent to more than 5 per cent.

Coronation portfolio manager Quinton Ivan said his fund had been buying additional shares in Woolworths Holdings for several months, but about half of the newly acquired stock was bought following last week’s takeover announcement.

“With the announcement of the David Jones transaction, and hearing the rationale about potential synergies between the two businesses, and given management’s track record of delivering on previous acquisitions like Witchery and Mimco, we believe they’ve got a good chance of actually delivering on DJs and we think it’s quite an attractive transaction, so we continue to increase our holding,” he said.

Mr Ivan said while the $4-a-share offer looked like a “full price” given it was pitched at about 21 times historical earnings a share, he was given comfort by the fact that DJs had earned 70 per cent more in 2011, as well as by the $612 million value of its wholly owned Sydney and Melbourne stores.

“The business has a rich underpinning in the four properties they own ... if you strip that out, the multiple is a lot lower, and if you add in the synergies they’re targeting, it’s lower still,” he said.

Woolworths chief Ian Moir has said he can boost DJs’ net profit by $130m in the first five years of ownership, primarily by introducing in-house brands offering higher margins than third-party merchandise.

In a further show of support, South African-based analysts for Deutsche Bank, Merrill Lynch, Goldman Sachs and Barclays this week confirmed their positive calls on Woolworths shares.

Woolworths now carries a “buy” rating from eight of 14 analysts surveyed by Bloomberg, with a further five rating it as a hold, while analysts for Macquarie are restricted from revealing their call because their corporate banking arm is advising DJs. Woolworths must put both the DJs acquisition and the capital raising with which it will be partly funded to a shareholder vote.

The DJs board, which has unanimously recommended shareholders accept the takeover offer, is understood to be more concerned about the reaction of Woolworths’ investors than its own.

Mr Ivan said while there was general support for the deal among Woolworths’ institutional investors it was far from assured that the company would achieve the necessary approval when it was put to the vote. “I don’t think it’s a slam-dunk — one of the concerns I’ve heard from foreign institutions is that they bought Woolworths for exposure to a developing market where earnings growth is faster, and they don’t like the fact that this exposure is going to be diluted,” he said.

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