The Merger of Myer and David Jones: TBC.
An interesting situation is unfolding between David Jones and Myer. Having done a lot of work preparing a merger-of-equals proposal last year, Myer is clearly convinced that a combination makes sense. At some point, a combination of the two presumably does need to happen.
Why? Put simply, the market for department store retailers seems to be in gradual structural decline. The trend overseas is for the number of department stores to decline (via mergers) in parallel with their market.
At the same time, the initial Myer proposal was clearly unable to be accepted, and Myer would have known that. A nil-premium deal that was entirely Myer’s initiative – with MergeCo to be headquartered in Melbourne, and with the CEO role presumably filled by a Myer candidate – was never going to win favour with the DJs board. The management arrangements have a definite whiff of takeover about them, and so the deal terms need to reflect some premium and potentially a cash component to win David Jones’ board approval.
It seems likely that Myer has another offer up its sleeve, but before it puts that on the table it wants to put the DJs board under as much pressure as possible, and the way to do that is to stir up the DJs shareholders. With the DJS board already reeling from director share trading and succession issues, the timing for Myer is more or less ideal.
At some point soon, Myer CEO Bernie Brookes will need to make a revised offer or walk away. In the meantime, however, we have an interesting situation where the merger proposal is apparently both dead and buried and still on the table, and a lot of newspaper column inches are being devoted to making this point to the DJS shareholders.
Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Chris B
:
Hi Andrew Legget,
I’ve read some of your blogs and it is good to hear your interesting insights.
DJ’s are a more expensive shop and Myer not so much. I don’t know how merging them would work. I can see the reason for it, but I don’t think it would work.
Large format stores are out of favour. Big book stores like Borders didn’t work with expensive rents and high costs. With online shopping, specialty bricks and mortar shops are emerging more where the products are hard to find online.
I think what you said about teaming up with local brands is one thing they can do to differentiate themselves. Myer own a percentage of Sass & Bide for example. They can sell exclusive lines.
And getting the online offering right.
Cosmetics is one of their highest margin and highest earning categories. But this is under real threat from online shopping. You can buy the same thing overseas for less money.
DJ’s had a good CEO with McInnes who is now at Premier Investments, lucky for them. Now Myer has a good CEO, Bernie Brooks.
The Myer float was very dirty, TPG floated again to gullible investors at a high price. TPG made a lot of money out of that and paid little tax.
During TPG’s ownership, they really put pressure on suppliers and cut staff numbers and some unsustainable things to make a quick profit.
lloyd taylor
:
Although there is some logic in the inevitability of a merger, the product of the marriage of two donkeys will never be a racehorse.
Roger Montgomery
:
Indeed. Well said. Charlie Munger put it thus: if you mix raisins with turds, they’re still turds.
Ade
:
I find shopping at DJ’s better so clearly Myer is one to profit from such a tie up
Andrew Legget
:
Hi Tim,
Been watching this with interest and think it is still a game in progress. This all happened whilst reading “barbarians at the gate” so i was already deep into the story of M&A.
My thoughts are that it would work assuming the ACCC give it the green light but obviously there are terms that still need to be increased and negotiated.
My strategy would be to use the combined firm to come up with a clear identity as to what both brands (I think especially with Myer this is something that they haven’t really nailed yet) want to be.
Use the existing store footprint and brands to fit this identity. Some DJ’s stores would probably be more successful as a Myer and vice versa. Some Myer brands would probably suit DJ’s more and vice versa. Some brands would be on offer in both stores but i think there should be a big focus in teaming up with brands particularly Australian brands starting to get wider appreciation for exclusive lines that can only be found in Myer or DJ’s.
Look to eventually closing existing distribution facilities and centralising in a better and larger facility where they are able to devote a lot of space and energy into a world class online retail business aimed both here and overseas (as i mentioned some Aussie companies i am told are starting to get a greater worldwide appreciation and these overseas customers need a place to buy).
They also need to really look at how they offer their service in the physical stores. There is room for innovation and the introduction of combining the physical stores and online sales.
This is just some general ideas (there are some funkier ideas i have as well as to what they can do), i am not going to get into the big details here but I agree with the general view that with the dept store market as it is, a combined DJS/MYR would be a better business (especially in regards to competing with world wide online businesses taking market share) than the two stand alone.
You can definitley keep the two brands seperate, by coming up with a clear identity for both and untangling the exclusive supplier arrangements to better fit this identity they would perform a lot better.