David Jones rejects Myer offer to merge into one “competitive retailer”

Just 18 months after David Jones was subject to a bizarre takeover bid from a relatively unknown company in the UK, talks of a merger have once again surfaced — this time with department store competitor Myer.

David Jones explained the details of Myer’s merger proposal in a statement released late yesterday after questioning from The Australian Financial Review, the newspaper today revealed. According to the retailer’s statement, David Jones was approached by Myer on 28 October 2013 with a proposal that would see DJs shares acquired by Myer in exchange for shares at the competitor.

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The statement described the proposal as “an invitation from Myer on a confidential, conditional, non-binding and indicative basis” and the proposed rate of exchange was 1.06 shares in Myer for each David Jones share. Myer also requested access to perform due diligence on David Jones.

However, as with the acquisition proposal that surfaced 18 months ago, David Jones revealed that the merger was not to be:

The Board formed the view that the invitation should be rejected shortly after it was received…[and] that the potential transaction did not have sufficient merit for David Jones shareholders.

The execution and implementation of any such transaction would have substantial commercial, market, business and regulatory risks (including the ACCC review process). It would involve the diversion of company resources over a lengthy period with great uncertainty as to the final outcome and the potential to result in diminution of value of the David Jones business.

For its part, Myer has since revealed details of the merger proposal — which it said would “create a sustainable, more competitive retailer” — and the subsequent rejection by David Jones one month later. According to a statement released by Myer this morning:

Myer has for some time been reviewing and implementing a range of strategic initiatives to strengthen the company’s competitiveness. As part of this review one option considered was a merger with David Jones and significant analysis was undertaken over an extended period leading to an approach being made.

Myer proposed to continue the Myer and David Jones brands as two “clearly differentiated” department store entities with different merchandise and store operations teams. Together the stores could offer “an enhanced merchandise assortment, brand portfolio, and exclusive and private label offering” — thus appealing to more consumers and offering more choice.

The retailer also highlighted that a merged Myer/David Jones would have generated $5 billion in sales over the last financial year, and $364 million in earnings (EBIT) before “cost synergies” were taken into account; Myer estimated these synergies at $85 million over three years, creating “more than $900 million of value to be shared by Myer and David Jones shareholders”.

As well as thinking of shareholders, Myer said the merged company could deal more efficiently with suppliers, while an enhanced omni-channel offering created by the two companies would be better placed to address the “structural shifts in retail internationally, including consolidation, segment specialisation and the growing impact of online shopping on traditional department store markets”.

The offer was officially declined by David Jones on 27 November 2013.

In an interesting footnote to the confidential merger talks, which were only revealed yesterday (three months after Myer’s first offer), The Australian Financial Review has called into question the move by two David Jones directors to buy shares in the company shortly after the deal was first mooted.

According to The Fin, “[David Jones’] statement does not address the issue of whether two David Jones directors — Leigh Clapham and Steve Vamos — should have been allowed to buy shares after Myer lodged its proposal and before a decision was made to reject the offer”.

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