SA Woolworths to buy David Jones
Recommendation
The board of David Jones has unanimously recommended shareholders accept a takeover offer by South African based retailer Woolworths (not to be confused with our own Woolworths, which is unrelated) for $4.00 per share in cash, foiling Myer’s proposal to merge.
The $4.00 offer price is a 27% premium to the three-month average share price, and a 55% premium to Myer’s offer of 1.06 of its own shares for each David Jones share.
Accompanying the announcement was a statement by David Jones’ chairman, Gordon Cairns, who said “This is a compelling proposal which represents a significant premium to our intrinsic value”.
We are certainly in agreement. No matter which way you look at it, a price-earnings ratio of 21 and price-book ratio of 2.5 is bizarrely generous for a retailer that hasn’t grown revenues or earnings in more than five years and faces an onslaught of structural challenges.
As we explained in The department store era is over on 10 Feb 14 (Sell – $3.08), consumers are increasingly buying their goods online from the likes of Amazon. Furthermore, an array of international retailers have recently entered the Australian market such as Zara, H&M and Gap which only adds to the competitive pressure.
In a telling sign, Sephora, the world’s largest retailer of cosmetics, has decided to bypass department stores altogether when it enters Australia next year and will instead open stand-alone boutiques. Myer and David Jones seem well and truly on the endangered species list.
Our previous article on David Jones concluded with “The department store era is all but over. The principal task for directors is to manage the decline”. The directors, and shareholders, have now been offered an exceptionally juicy way to do just that.
Shareholders will only get to vote on the proposal in late June. But with the share price now hovering just below the offer price and up 28% since 10 Feb 14 (Sell – $3.08), we wholeheartedly recommend you SELL.