What would a David Jones and Myer merger mean for Australian retail?

Retailers, consumers and business analysts have today had cause to imagine the future of Australian retail landscape without a duopoly of department stores.

Late last night, David Jones confirmed that it received an unsolicited merger offer from Myer in October last year that would have seen the two companies uniting into a single entity (albeit retaining the individual Myer and David Jones brand names and stores).

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David Jones rejected the offer, saying it “did not represent sufficient value for…shareholders”. For its part, Myer released a statement this morning standing by its acquisition proposal, believing the merged company would have been able to “more effectively compete in what is now a globally competitive market”.

Reading the statements from both companies, it’s hard to imagine a future where two of Australia’s most well-known retail rivals would ever unite. Older Australians may well remember a day when their allegiance was divided between Grace Bros and David Jones, but Grace Jones? That may be a bit too much for the established retail set. That said, today’s notoriously tough retail climate is a brave new world.

The fact remains, Myer and David Jones are no longer the only kids on the block. The rise of online retail means that the average consumer has more options now when it comes to buying their apparel, appliances, cosmetics or homewares.

Consumers can now go to specialty online retailers for specific needs (be it apparel from ASOS, cosmetics from StrawberryNet or appliances from any number of dedicated omnichannel retailers in Australia and overseas). And if they’re after an established department store name, they now have a greater choice with international retailers such as America’s Saks 5th Avenue and Macy’s offering shipping to Australia. UK giant Mark’s & Spencer has even shown its hand with a bid to enter the Australian market.

Despite the increasingly competitive market, it remains to be seen whether the Australian Competition and Consumer Commission (ACCC) would ever approve a merger between two major players in the Australian retail space.

The ACCC today released a statement saying it was provided with background information when the merger was originally proposed, but because “the transaction was at a preliminary stage and went no further” a formal review was not conducted:

If a transaction was to occur, the ACCC would conduct a public review.

The ACCC reviews mergers and acquisitions which have the potential to raise concerns under the Competition and Consumer Act 2010. The CCA prohibits acquisitions that would have the effect, or be likely to have the effect, of substantially lessening competition in a market.

Commenting on the possibility of the ACCC approving such a merger, CIMB retail analyst Daniel Broeren told Appliance Retailer it “could happen, but is not likely”:

I can image however that Myer would claim that the two stores combined only make up a small percentage of the various categories they participate in (for example, Myer and David Jones combined would be less than 10 per cent of the apparel market in Australia). The only category where they may control more than 50 per cent would be in high-end cosmetics.

While he did not see a great risk to the competitive landscape in Australia, he added, “that wouldn’t stop the ACCC preventing it”.

As far as what a chopped and changed Myer Jones could look like, Broeren said it would “result in a much stronger group that would probably take more divergent strategies to avoid crossover (Myer going more down market, DJs moving more upmarket)”.

But for the time being, such a future is only speculative.

With David Jones rejecting the merger offer, Broeren took the view that “the only way Myer could join the companies would be via hostile takeover”.

If Myer achieved a hostile takeover, it would then need approval by the ACCC. While this may very well be granted, it nonetheless comes with considerable risk. A level of risk that the board would not be able to take in my view. If Myer did successfully acquire DJs in a hostile takeover, paying a 30 per cent to 40 per cent control premium, and subsequently did not receive ACCC approval, it would be forced to divest, destroying significant value and compromising the viability of the business.

In addition, given Bernie Brooks has $26 million in shares and finishes as CEO in August, he would not take this risk unless he had pre-approval from the ACCC.

At this stage I see it unlikely that the Myer’s Board pushes forward down the hostile path. Nonetheless this issue will be on the agenda for some time now, and you never can say never.

For now, the idea of a merged Myer and David Jones is purely speculative. But as Broeren says, you can never say never. Australia is left with two major department stores… for now.

But just like its flashy namesake, ‘Grace Jones’ may never be far from coming back into the spotlight.

Are two stores better than one? Should Myer and David Jones merge to become more competitive? Leave your thoughts in the comments section below.

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