Paul McClintock, the Myer chairman, made the approach to David Jones. Photo: Sasha Woolley
Myer has argued a $ 3 billion merger with David Jones would have delivered compelling value for the shareholders of both companies, as well as providing strategic opportunities to grow both brands.
Myer confirmed on Friday that it approached David Jones with a confidential non-binding, indicative merger proposal on October 28 and said David Jones formally rejected the proposal on November 27.
But analysts have questioned the savings the tie-up would create, especially if the competition authority forced the closure of some of the two department stores’ combined 115 stores.
Myer chairman Paul McClintock said the retailer had been reviewing 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.
The confidential, non-binding, indicative proposal was conditional and also subject to regulatory approvals, due diligence and the unanimous recommendation of the David Jones board in support of the transaction, Myer said.
Under the proposal, which is believed to have valued David Jones at $ 1.5 billion, the merged company would have run Myer and David Jones as separate store brands that would have been better equipped to compete effectively in the changing retail market.
Myer and David Jones would have more clearly differentiated offers and the two brands would have provided an enhanced merchandise assortment, brand portfolio, and exclusive and private label offering, Myer said.
The merged company would therefore have appealed to a broader customer base and would be able to give customers greater choice and a better shopping experience, it said.
The combined group would have generated pro forma sales and earnings before interest and tax in 2013 of about $ 5 billion and $ 364 million, before any cost synergies. On Friday David Jones shares ended up more than 4.2 per cent at $ 2.99. Myer shares ended down 1.6 per cent at $ 2.53.
In his letter to David Jones chairman Peter Mason, Mr McClintock said the rationale for a merger was “highly compelling” and had the potential to provide substantial benefits to both companies, their shareholders and customers, creating a more sustainable and competitive omni-channel retailer.
It would deliver economies of scale and increased scope in operations, enabling the combined business to compete more effectively in the new global retail sector.
“This would facilitate growth in both brands, a better experience for customers, and deliver improved shareholders returns,” he said.
Myer proposed a nil-premium merger, via a scheme of arrangement, offering 1.06 shares for every David Jones share.
Mr McClintock said Myer had conducted significant research and analysis on the benefits of a merger, with input from leading international experts and advisers, including Goldman Sachs, Flagstaff Partners, Bain and Co management consultants, Allens, Clayton Utz, KPMG, Michel Retail, a property consultant, and public relations firm John Connolly and Partners.
Goldman Sachs had agreed to provide debt finance, if existing borrowings needed to be refinanced, subject to due diligence and other conditions.
Under the terms of the deal, the boards had to agree to retain both store brands and a corporate name change and to agree on the appointment of a chairman and a chief executive.
Both Myer chief Bernie Brookes and David Jones CEO Paul Zahra have announced their intention to resign.
The proposal was conditional on the David Jones board unanimously recommending the scheme of arrangement.
Myer said it had made preliminary contact with the Australian Competition and Consumer Commission and its advisers had done significant work on the potential impact of the merger.
“Based on this analysis we believe the transaction is pro-competitive as it enables the merged entity to more effectively compete in what is now a globally competitive marketplace,” the offer said.
Myer believed a merger could have achieved more than $ 85 million of ongoing annual cost synergies within three years, creating the potential for more than $ 900 million of value to be shared by Myer and David Jones shareholders.
Myer said the merger could also have provided opportunities to maximise the value of David Jones’ property assets for shareholders.
“Myer and its advisers believe that the transaction would have enhanced competition as it would have enabled the merged entity to more effectively compete in what is now a globally competitive market,” the company said.
David Jones rejected the proposal, saying it did not offer a premium and did not represent sufficient value for shareholders.
But one of David Jones’ biggest shareholders, Allan Gray, has urged the company to reconsider the offer.
Citigroup analyst Craig Woolford estimated savings of $ 30 million to $ 40 million from merging head office, back-end systems and store closures, while working capital could reduce by $ 30 million.
“We doubt the synergies would be retained,” Mr Woolford said. “Aligning the two teams would lead to a smaller sales base, taking away a large part of the synergies.”