FROM BEHIND THE PAYWALL
Is Woolworths planning to take over Australia's largest department store chain?
Is that why the wily Solomon Lew has upped his stake in Myer?
Free to read from Financial Mail's archives. First published in September 2017.
One late afternoon in March, an A$100m raid was carried out on the shares of Myer, one of Australia’s two high-end department store chains.
Days later, retail tycoon Solomon Lew emerged as owner of 10.8% of the company through his listed vehicle Premier Investments. The Myer trade was executed by Pershing and Blue Ocean Equities, brokers used by Lew in an earlier share sweep.
Financial high jinks is his thing.
In the final throes of Woolworths’ R23.3bn buyout of David Jones (DJs) in 2014, Lew, Australia’s 15th-richest man, amassed a blocking stake in DJs. It served as a thinly veiled threat, forcing Woolworths to buy the remainder of clothing group Country Road at a fat premium.
The gamble would go on to end his storied tenure as a minority shareholder in Country Road spanning nearly 17 years, the hallmark of which was outbursts so grating as to make activist investors Nelson Peltz and Carl Icahn look like kittens.
With their southern hemisphere retail play held to ransom, Woolworths eventually coughed up the extra R2bn to bag DJs.
Lew proved to be one of Australia’s shrewdest and most patient investors.
His rounding on Myer shares is doubtless part of a bigger gambit — former sparring partners warn that he is not to be underestimated.
Myer is steeped in a vague iteration of an A$600m turnaround plan in a retail market undergoing structural change. It’s cheap and vulnerable and this makes it prey.
Shares are currently trading at A$0.76 from the A$4.10 they floated at in 2009. Earnings haven’t grown in roughly six years.
UBS, Macquarie and Goldman Sachs have revised down estimates for Myer’s profits
This pretty much rules out Lew’s Myer move as a vote of confidence in the company’s transformation strategy and strengthens the case that there’s something else afoot and that he’s positioning himself to capitalise.
Lew’s stake in Myer is being seen as leverage, which he is likely to hang onto in the expectation of being able to influence a would-be buyer into ultimately paying a higher price.
As with most change that is structural, regardless of sector — media, manufacturing or banking — consolidation is inferred. While other potential buyers are said to have run the rule over Myer, some of them South African (Steinhoff, The Foschini Group and, rather oddly, Edcon), one name is sticking: Woolworths. In the long term and after some success in the Australian market, it is expected to bid for Myer and merge it with DJs.
Brian Walker, founder and CEO of Retail Doctor, says a DJs/Myer "marriage" was first mooted three years ago. Myer proposed an all-stock, nil-premium "merger of equals" in early 2014, which DJs swiftly rejected. Woolworths, never one for half measures, took the opportunity to pounce with a richer offer.
"Myer are trading themselves into acquired mode. Time will tell," says Walker. "There has been a whisper for some time now of a merger – I suspect that Solly is looking after a bargaining chip."
Walker, along with other market insiders, believes there will ultimately be only one department store channel in Australia.
Though DJs has its hands full, when it comes to doing what it deems necessary it appears to be under no illusions.
"Retail has changed more in the past five years than in the 15 years before that," says DJs CEO John Dixon.
I don’t think their balance sheet could handle it and issuing equity at these low prices isn’t great.Michael Treherne, portfolio manager at Vestact
"The rate of change will not slow. The world over, customers have more choice than they have ever had so there will continue to be more consolidation in this market [Australia] and most other markets. Competition has never been so fierce; everyone has to sharpen their act. There will undoubtedly be further consolidation."
If DJs — and, by extension, Woolworths — were eventually to gain control of Myer, it would give them the entire Australian high-end department store market, making them formidable competitors to online and specialist apparel retailers alike.
The easy wins would be synergies in procurement, marketing and logistics, and cost saving from consolidating property, back office and management.
Broker Citi says Myer’s key asset is its "cheap rents" in high-quality Australian shopping centres, where it pays less than a fifth the rent of speciality retailers in the same centres.
Yet Michael Treherne, portfolio manager at Vestact, which rates Woolworths a "buy", doesn’t see it making any big purchase in the near future. "I don’t think their balance sheet could handle it and issuing equity at these low prices isn’t great."
He reckons Woolworths would rather go for smaller, bolt-on purchases to complement its brand offering or bolster supply chain and logistics.
Should a bid for Myer surface at some point, Lew would have commercial interests to protect.
Through private family interests, including Voyager Distributing Company and Playcorp, Lew is one of Myer’s largest suppliers of branded and private-label goods alike. He’s had a long and thorny history with Myer, though, having been a director and chairman of the old Coles Myer group before being forced off the board in a public spat in 2002.
He has been outspoken about Myer’s performance since its initial public offering IPO, and some say he still harbours some resentment. It’s worth noting, too, that Lew’s top lieutenant is ousted DJs boss Mark McInnes, who was sacked over sexual harassment allegations in 2010. The case was settled out of court for A$850,000 and McInnes became head of Lew’s Premier Investments.
Stuart Bennie, a retail consultant at Sydney-based Impact Retailing, says: "Solly definitely has a ‘thing’ about Myer and will continue to conduct his raids to increase his stockholding ... The million-dollar question is whether the department store pie is big enough for both Myer and DJs, given the retail landscape and significant and increasing competition, especially from outside
Australia. If not, who will blink first?"
Lew is certain to play a part in any bid for Myer and it will become apparent in good time if the snap-up was a prelude to a deal. For now, the motive of his share raid remains a mystery.
If history is any guide, Lew is good at waiting it out.