Publications
Partners
Sydney - Chief executive of Woolworths [JSE:WHL] Ian Moir said on Wednesday that the retailer is buying David Jones to build a bigger brand and suggested that the future of department stores is still bright.
David Jones is Australia's second-largest department store and Woolworths is in a $2bn deal to take it over.
The deal, the biggest for Woolworths to date, creates a leading southern hemisphere retailer that will benefit from greater scale and a common fashion seasonality.
It also provides David Jones, which has seen profits decline for the past three years as competition from overseas players heats up, with more expertise in online offerings and private brands.
"The view that we take as a business is that the department store isn't dead - mediocrity is dead," Moir said at a briefing in Sydney.
"In short, we're buying this business to build a bigger southern hemisphere brand."
The news of the deal failed to lift the share price of Woolworths on the JSE. After lunch time trading the share price was down -6.03% to R69.04.
Resilient consumer spending, fuelled by a strong local currency and record low interest rates, has encouraged the likes of Sweden's Hennes & Mauritz, and Japan’s Fast Retailing, the operator of the Uniqlo clothing chain, to set up shop in Australia.
Woolworths offered A$4.00 per share for David Jones. That represents a 25% premium to its closing price on Tuesday and a 40% premium to its close on January 30 when the Myer offer was made public.
Strategic sense
"This makes a huge amount of strategic sense, they can afford to pay a high multiple," said Commonwealth Bank retail analyst Andrew Mclennan. "There is going to be big synergies coming from this transaction."
Woolworths' profits have grown 20% annually in the past five years on investments in product development, tighter inventory management and through online sales, and the company plans to bring this expertise to David Jones, Moir said.
He estimated that the company could add at least A$130m annually to David Jones' bottom line within five years.
David Jones posted an annual profit of A$95.2m in the last financial year.
Its shares jumped to match the bid price but later pared gains slightly to end the day 23 percent higher at A$3.91.
All about scale
The offer prompted Myer, Australia's biggest department store, to withdraw its nil-premium all-stock proposal that valued David Jones at A$1.7bn as of Tuesday's closing price, and which it had touted as a merger of equals.
In 2013, Woolworths revenue was $3.6bn and David Jones was $1.7bn, putting their combined sales above Myer's $2.9bn, although still far below rivals like Marks & Spencer which garnered $15.3bn.
"What we are seeing is like a global consolidation of retail," said Morningstar analyst Tim Montague-Jones.
"That's increasingly seeing stronger retail models expand offshore and take market share from weaker ones. It's all about scale," he said, noting Myer would be left in a much weaker competitive position.
Shares in Myer ended 3.9% higher, however, on relief that it would not be over stretching in seeking a deal with David Jones.
Attractive Australia
Analysts expect to see more competition in the Australian market as more players seek a slice of the pie. Marks & Spencer may also be planning to set up shop, local media reported.
Australian retail sales rose 0.2% in February to a record A$22.97bn, following a 1.2% climb in January.
It was the 10th straight month of increases, the longest such stretch since 2006/07. The retail sector accounts for 17% of Australia's A$1.5 trillion in annual gross domestic product (GDP) and is the second-biggest employer, providing 10% of all jobs.
The deal also came on the same day that a measure of Australian consumer sentiment rose for the first time in five months in April as households became more optimistic on the near-term outlook for both the economy and their own finances.
Woolworths Holdings, which has no relationship with Australian supermarket chain Woolworths Ltd, already has experience in the Australian market, owning 88% of upmarket clothing retailer Country Road Ltd as well as another clothing chain Witchery.
It said it would finance the deal with debt, cash and equity fund raising. It does not plan to reduce jobs at David Jones after the takeover, it added.
David Jones was advised by Gresham Advisory Partners Ltd, Macquarie Capital and law firm Herbert Smith Freehills. Woolworths was advised by Rothschild and Standard Bank.
David Jones is Australia's second-largest department store and Woolworths is in a $2bn deal to take it over.
The deal, the biggest for Woolworths to date, creates a leading southern hemisphere retailer that will benefit from greater scale and a common fashion seasonality.
It also provides David Jones, which has seen profits decline for the past three years as competition from overseas players heats up, with more expertise in online offerings and private brands.
"The view that we take as a business is that the department store isn't dead - mediocrity is dead," Moir said at a briefing in Sydney.
"In short, we're buying this business to build a bigger southern hemisphere brand."
The news of the deal failed to lift the share price of Woolworths on the JSE. After lunch time trading the share price was down -6.03% to R69.04.
Resilient consumer spending, fuelled by a strong local currency and record low interest rates, has encouraged the likes of Sweden's Hennes & Mauritz, and Japan’s Fast Retailing, the operator of the Uniqlo clothing chain, to set up shop in Australia.
Woolworths offered A$4.00 per share for David Jones. That represents a 25% premium to its closing price on Tuesday and a 40% premium to its close on January 30 when the Myer offer was made public.
Strategic sense
"This makes a huge amount of strategic sense, they can afford to pay a high multiple," said Commonwealth Bank retail analyst Andrew Mclennan. "There is going to be big synergies coming from this transaction."
Woolworths' profits have grown 20% annually in the past five years on investments in product development, tighter inventory management and through online sales, and the company plans to bring this expertise to David Jones, Moir said.
He estimated that the company could add at least A$130m annually to David Jones' bottom line within five years.
David Jones posted an annual profit of A$95.2m in the last financial year.
Its shares jumped to match the bid price but later pared gains slightly to end the day 23 percent higher at A$3.91.
All about scale
The offer prompted Myer, Australia's biggest department store, to withdraw its nil-premium all-stock proposal that valued David Jones at A$1.7bn as of Tuesday's closing price, and which it had touted as a merger of equals.
In 2013, Woolworths revenue was $3.6bn and David Jones was $1.7bn, putting their combined sales above Myer's $2.9bn, although still far below rivals like Marks & Spencer which garnered $15.3bn.
"What we are seeing is like a global consolidation of retail," said Morningstar analyst Tim Montague-Jones.
"That's increasingly seeing stronger retail models expand offshore and take market share from weaker ones. It's all about scale," he said, noting Myer would be left in a much weaker competitive position.
Shares in Myer ended 3.9% higher, however, on relief that it would not be over stretching in seeking a deal with David Jones.
Attractive Australia
Analysts expect to see more competition in the Australian market as more players seek a slice of the pie. Marks & Spencer may also be planning to set up shop, local media reported.
Australian retail sales rose 0.2% in February to a record A$22.97bn, following a 1.2% climb in January.
It was the 10th straight month of increases, the longest such stretch since 2006/07. The retail sector accounts for 17% of Australia's A$1.5 trillion in annual gross domestic product (GDP) and is the second-biggest employer, providing 10% of all jobs.
The deal also came on the same day that a measure of Australian consumer sentiment rose for the first time in five months in April as households became more optimistic on the near-term outlook for both the economy and their own finances.
Woolworths Holdings, which has no relationship with Australian supermarket chain Woolworths Ltd, already has experience in the Australian market, owning 88% of upmarket clothing retailer Country Road Ltd as well as another clothing chain Witchery.
It said it would finance the deal with debt, cash and equity fund raising. It does not plan to reduce jobs at David Jones after the takeover, it added.
David Jones was advised by Gresham Advisory Partners Ltd, Macquarie Capital and law firm Herbert Smith Freehills. Woolworths was advised by Rothschild and Standard Bank.
