A Question of Value
Here’s a question for you. If a company receives a takeover offer at a material premium to its current share price, has the company’s management been successful at realising value for its shareholders?
Let’s explore this question in terms of the recent takeover proposal of David Jones. The period played out very much like a community dance. Myer (ASX: MYR) invited David Jones (ASX: DJS) to go together to the event. During the dance, Myer made continual advances to entice David Jones onto the dance floor. David Jones was aloof, maintaining interest in the proposal while preferring to stay seated and watch from the sidelines. Before the music stopped, the South African-based retail group, Woolworths Holdings, swept David Jones off its feet with an offer too good to refuse.
When commenting on the proposal, the company believed it was a compelling offer which realised value for shareholders. For example, the $4.00 per share offer represented a 39.4 per cent premium to the price of David Jones shares on 30 January 2014 (being the last closing price prior to the Myer proposal becoming public). Yet what role did the existing management of David Jones play in delivering these returns?
In March 2012, David Jones announced its Future Strategic Direction Plan (FSDP) in response to deteriorating business conditions and structural changes in the industry. Management were yet to realise the benefits of this plan before the offer by Woolworths Holdings, as the company’s return on equity had halved to 12.5 per cent since 2012. Such a premium suggests that the acquirer is confident the changes that existing management were introducing was gaining traction and they could also do more with the business.
This concept of what constitutes “value” may seem counterintuitive – after all, isn’t the desire of all shareholders to have the share price sustainably increase? Well, yes, but the share price should be a reflection of the underlying fundamentals of the business, which management have a role in developing. A quality company that achieves consistent returns should experience comparable movements in its share price. To answer the question, consider whether the share price would have appreciated by a comparable amount over time if Woolworths Holding didn’t turn up to the dance.
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.
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garry howlett
:
I wonder if Woolworths holdings can add any value? Many small and large South African companys have failed in Oz.
A more educated, demanding and affluent customer here, in much lessor quantity makes it a very different market.
Roger Montgomery
:
Country Road seems to be doing better that it was previously…
Roger Montgomery
:
My friend Adam Schwab wrote a terrific book called Pigs at the Trough..which has nothing to do with the following excerpt from The Australian on April 23rd this year:
“With most of the current financial year already over, Mr Cairns’s comments appear to indicate that the board may be prepared not only to fast-track the issue of free shares already allocated, but to issue even more free stock in respect of the current financial year — possibly doubling the payout each would receive.
The biggest winner from the move will be chief executive Paul Zahra, who as of July last year had 300,000 unvested performance shares. DJs shareholders last year agreed to issue Mr Zahra with up to 335,000 more free shares over the next three years, although the issue attracted a significant protest vote of about 35 per cent.
Also in line for windfalls will be the seven executives who report to Mr Zahra directly: chief financial officer Brad Soller, head of retail services Tony Karp, head of merchandise Donna Player, head of operations Cate Daniels, marketing and financial services boss David Robinson, human resources chief Paula Bauchinger and head of strategic planning Matthew Durbin.
The move will see the executives handed millions of free shares they will then be able to sell at $4 apiece to takeover suitor Woolworths Holdings, which has no connection to Australian retailer Woolworths Limited.”
Andrew Legget
:
Thanks for the insight Roger. Also agree regarding “Pigs at the Trough” – a good book. A very very good and insightful read that i thoroughly recommend.
Andrew Legget
:
Perhaps the takeover offer was value based on fundamentals, however fundamentals which only exist in the event of a new parent entity to oversee how it is run.
My opinion is that the management of DJS played a really big part in the generation of this takeover offer but not in a positive way. As you said the ROE had halved, its performance over the recent years has left a lot to be desired, they have botched strategy by not getting seriously into online retailing when it was clear that this was the way forward. They have relied solely i believe, on the brand equity behind the name and now deisre to be property developers.
To answer your last point, i do not believe there would have been a material share price increase if woolworths did not turn up to the dance as the price that existed before hand were pretty close to fair considering the current state.
I am sure Woolworths believe they can make changes that brings the ROE and overall performance up to where it used to be and good luck to them (assuming they suceed in taking over the company). The competitive landscape is only getting more difficult so it will be interesting to see what they do.