David Jones Seen Luring LBO on Lowest Value Since ’04: Real M&A
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Sergio Dionisio/Bloomberg
Revenue at David Jones, which sells everything from ties and fragrances to suitcases and cameras, peaked at A$2.1 billion in the year ending July 2008, according to data compiled by Bloomberg. It will fall about 10 percent from that high to A$1.9 billion this fiscal year, analysts’ estimates compiled by Bloomberg show.
Revenue at David Jones, which sells everything from ties and fragrances to suitcases and cameras, peaked at A$2.1 billion in the year ending July 2008, according to data compiled by Bloomberg. It will fall about 10 percent from that high to A$1.9 billion this fiscal year, analysts’ estimates compiled by Bloomberg show. Photographer: Sergio Dionisio/Bloomberg
With David Jones Ltd. (DJS) trading at the
lowest price to its net assets in eight years, the Australian
department store’s real estate is making it a buyout candidate.
Competition on the Internet from American retailers,
including Saks Inc. and Nordstrom Inc. (JWN), and Australian savings
rates that are more than double those in the U.S. have sent
shares of Sydney-based David Jones down 51 percent in the past
year. After Australia’s second-largest department store operator
also projected its smallest annual profit in six years, the
company is trading at 1.4 times the value of its assets minus
liabilities, a level not seen since May 2004, according to data
compiled by Bloomberg.
While the slump has pushed David Jones’ market value down
to A$1.2 billion ($1.2 billion), its real-estate holdings alone
would be worth as much as A$1 billion if sold and leased back,
Bank of America Corp. said. With Australia’s central bank now
cutting interest rates, and David Jones in need of a turnaround,
now is the time for potential buyers to look, according to
Commonwealth Bank of Australia.
David Jones’ real-estate portfolio is “something tangible
that investors can hold onto when there’s capitulation in the
market,” said Robert Penaloza, Sydney-based head of equities at
Aberdeen Asset Management Ltd., which oversees about A$18
billion in Australia. “The company still has a decent brand
name and its positioning in the market is still valid.”
Four Properties
Helen Karlis, a Sydney-based spokeswoman for David Jones,
said she had no comment on takeover speculation.
Australia’s oldest department store, David Jones was
founded in 1838, half a century after Britain started sending
convicts to the country. The company is named after the Welsh-
born immigrant that opened a central Sydney store to sell “the
best and most exclusive goods,” according to its website.
The four sites that David Jones owns, one each on Elizabeth
Street and Market Street in Sydney and two on Bourke Street in
Melbourne, account for a quarter of the retailer’s sales, Karlis
said. They are adjacent to some of the priciest retail strips in
the world, according to Kevin Stanley, research director of
property consultants CBRE Group Inc. (CBG), the world’s largest
commercial real estate services company.
“The pedestrian flows in these areas are very high,” he
said. Sydney is the world’s third-most expensive city for retail
rents after New York and Hong Kong, and Melbourne the eighth-
most expensive, ahead of Milan, Frankfurt and Chicago, CBRE said
in a report last November.
Falling Sales
Revenue at David Jones, which sells everything from ties
and fragrances to suitcases and cameras, peaked at A$2.1 billion
in the year ending July 2008, according to data compiled by
Bloomberg. It will fall about 10 percent from that high to A$1.9
billion this fiscal year, analysts’ estimates compiled by
Bloomberg show.
David Jones, which didn’t include an online strategy in its
three-year plan released in 2008, trails rivals in tapping the
web. Comparing itself to 10 retailers including New York-based
Saks (SKS) and Nordstrom, David Jones said in March it generated the
smallest proportion of total sales — less than 1 percent –
from the Internet. U.K. department store operator John Lewis Plc
ranked first with 17 percent, while Saks and Seattle-based
Nordstrom each derived about 9 percent of revenue online.
U.S. and foreign retailers that ship to Australia are
capitalizing on an Australian dollar that has climbed 27 percent
against its U.S. counterpart in the past three years. In Hong
Kong, StrawberryNET sells a jar of Clinique Daily Relief
moisturizer for A$55, a price that includes shipping to
Australia. The same product at David Jones’ online site is
offered for A$90, 64 percent more.
Higher Borrowing Costs
After Australia recovered from the global financial crisis
that peaked in 2008, David Jones and the country’s other
retailers have struggled as interest rates climbed to 4.75
percent, the highest in the developed world.
The savings rate among Australian consumers reached 12.6
percent in December 2008, a level last seen in 1986, according
to data compiled by Bloomberg. At the end of 2011, it was 9
percent, still more than double the pace before the financial
crisis and about twice the personal savings rate in the U.S. at
the same point.
The central bank this month made its steepest cut to
borrowing costs in three years, reducing the benchmark rate to
3.75 percent.
A potential buyer of David Jones will need a plan to solve
its problems by lowering prices, investing in technology and
expanding its Internet platform, said Andrew McLennan, an
analyst at Commonwealth Bank in Sydney.
‘Pretty Good Deal’
“When these things are under a fair degree of cyclical
pressure and there are some structural concerns, this is the
time to have a look at them,” he said. “If some of those
structural concerns can be overcome and the cycle recovers,
you’ve ended up with a pretty good deal.”
David Jones forecast its lowest annual profit since 2006
for the year ending in July, spurring an 11 percent drop in its
shares on March 21. In the past year, the stock is the worst
performer among 22 Australian retailers with a market value
greater than $100 million, data compiled by Bloomberg show.
Down 51 percent in that period, compared with an average
drop of 5.4 percent for the group, David Jones is trading at 1.4
times the value of its assets minus liabilities, or book value,
of A$803 million. That’s the lowest multiple since May 10, 2004,
data compiled by Bloomberg show.
Myer Path
The slump has created an opportunity for an acquirer to
capitalize on the value of David Jones’s real estate in Sydney
and Melbourne’s central business districts, according to Silvia Spadea, an analyst for Bank of America. If sold and leased back,
the stores in Australia’s biggest cities may be worth as much as
A$1 billion, Spadea wrote in a note last month. Spadea didn’t
return a request for an interview.
“David Jones is unique” compared with most retailers in
owning its valuable property assets, Spadea wrote. An external
party, such as a financial buyer, “would be in the best
position” to monetize the assets.
Using a “mid-point” valuation of A$800 million, the real
estate is worth A$1.52 a share, according to Bank of America,
which based its estimates on consultations with several property
developers, according to an April 12 note. David Jones shares
closed at A$2.20 last week.
Any buyer taking this route would be following the lead of
Fort Worth, Texas-based TPG Capital, which bought Australia’s
largest department store chain Myer Holdings Ltd. (MYR) for A$1.4
billion in 2006, said Michael Simotas, an analyst at Deutsche
Bank AG. The buyout firm sold the retailer’s flagship property,
next door to David Jones’s Melbourne store, the next year for
A$605 million.
‘Quite Reasonable’
“The property is certainly a factor and there is value
that could be unlocked,” said Sydney-based Simotas. “The
appetite for those assets would be quite reasonable.”
David Jones sold the stores once, only to reacquire them in
September 2006 for A$362 million to regain control of
redevelopment and avoid rising rental payments, according to
data compiled by Bloomberg.
Rents for the best retail locations in central Melbourne
have increased by an average 7 percent a year since 2006 and now
stand at A$8,700 per square meter, while those in central Sydney
have risen by 2 percent a year to A$11,500 per square meter over
the period, CBRE’s Stanley said.
TPG, which refurbished stores and boosted Myer’s profits,
sold the retailer in an October 2009 initial public offering
that valued Myer at A$2.4 billion. A buyer of David Jones would
also have to see an opportunity to turn the fundamentals around,
said Simotas, who has a sell rating on the stock.
New Strategy
“Normally when a sponsor looks at a business like this, it
wouldn’t rely on getting an acceptable return using financial
engineering alone,” he said. “It would like to think it could
improve the business by making management or structural
changes.”
David Jones Chief Executive Officer Paul Zahra, mapping out
a strategy in March under what he called the toughest conditions
in his 30 years of retailing, said he’ll increase the number of
products available through the website to 90,000 from 9,000. The
company will lift online sales to about 10 percent of total
revenue from less than 1 percent, it said.
Potential buyers of David Jones may be deterred by the
prospects for Australian retail, said Martin Duncan, a fund
manager at Arnhem Investment Management in Sydney.
‘Dour Outlook’
“It would be highly unlikely because of the generally dour
outlook for retailing,” said Duncan. “The outlook continues to
be bleak because consumer confidence continues to be weak.”
Australian consumer confidence in May stagnated near the
lowest level this year as concern about the global economy and
the Greek debt crisis offset the central bank’s rate cut. From a
year earlier, confidence was down 8.3 percent, according to a
Westpac Banking Corp. and Melbourne Institute survey.
The slump in confidence hasn’t stopped buyout funds from
pursuing local consumer companies. KKR Co. approached Pacific
Brands Ltd. (PBG), Australia’s biggest underwear maker, in January.
TPG Capital offered to buy surfwear maker Billabong
International Ltd. (BBG) in February.
“We know private equity are having a sniff around these
assets, generally,” said Commonwealth Bank’s McLennan. “There
have been a lot of headwinds in the Australian household sector
which will not stay around forever, so let’s not get too
depressed about the retail sector.”
With David Jones trading so near the value of its assets,
there’s the chance to make money through a takeover, said
Penaloza at Aberdeen Asset Management.
“Interest rates are low, you can probably borrow enough to
buy the assets, sweat the assets and perhaps sell it on when
times are better,” he said. “Online is another way of shopping
but it’s not going to kill the bricks and mortar.”
To contact the reporters on this story:
Angus Whitley in Sydney at
awhitley1@bloomberg.net;
David Fickling in Sydney at
dfickling@bloomberg.net.
To contact the editor responsible for this story:
Daniel Hauck at
dhauck1@bloomberg.net;
Katherine Snyder at
ksnyder@bloomberg.net;
Philip Lagerkranser at
lagerkranser@bloomberg.net.
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