Ragtrader founder Fraser McEwing gives his take on the market - this time on merger and acquisition whispers.
There seem to be a lot more sellers in the shadows than buyers, remembering that big companies never advertise either a desire to buy or sell – unless an offer is being sought by a liquidator.
The dealing is usually handled by schtum brokers or via furtive meetings in coffee shops.
An exception to the schtum rule is the Sussan Group with around 500 stores under the brands Sussan, Suzanne Grae and Sportsgirl. Because this is not a sale under duress, the pressure has been on the buyer, rather than the seller, to measure up.
Owner Naomi Milgrom must have been in quite a few huddles over recent times as suitors sat down with her, but were sent away to sharpen their pencils or their reputations.
She’s in the enviable position of offering an encouragingly profitable, very well-run company for sale. Revenue is around $500 million with net profit around $30 million.
This is a for-sale that is not just about money.
At 65, Milgrom is one of Australia’s wealthiest women with art and other interests that transcend fashion retailing. Having said that, she obviously wants a fair price – reportedly around the $300 million mark. And since the wellbeing of the Sussan Group and its employees are important to her, it’s not just money that will buy it.
There have been several overtures from local and overseas buyers that include the South African based Foschini Group (current owners of the menswear Retail Apparel Group), and a low offer from Noni B, but none have floated Milgrom’s boat.
Probably the nicest fit would be from Solly Lew’s Premier Investment Group that has the money and the expertise of whizz retailer Mark McInnes – to say nothing of Solly’s business genius. Solly is a personal friend of Naomi and I’m sure they’ve talked about it.
At the other end of the line is Harris Scarfe and Best & Less owned by the in-trouble South African Steinhoff Group. Best & Less continues to battle away in the budget affray but gets lost among overwhelming competitors Like Noni B, Big W and Kmart to name a few.
Harris Scarfe is a curious mixture of apparel, homewares, electrical and manchester that would have the best chance of success in under-retailed faraway regions, but gets trampled in the city and suburbs. These groups have been for sale for nearly two years, along with Fantastic Furniture and Freedom Furniture. A possible buyer for the apparel stores might be Noni B based on its appetite for picking up dismal performers like the Speciality Fashion Group so that it can show growth and maybe turn their profitability upwards.
Noni B itself is probably buyable because I don’t see its major shareholder, Alceon, being too happy with the underlying performance of the group, in spite of the tiddlywinks maintenance of the share price and some optimistic announcements.
There is quite a gap between trade and shareholder perception of Noni B.
Australia’s two major department store groups, David Jones and Myer, are doing it tough, although I’ve got to hand it to Myer CEO John King who has managed to pump up the Myer share price by nearly double since he took over. That could encourage a buyer, probably from overseas, to follow David Jones into private hands.
But the problem remains that department stores are fast losing relevance as specialists overwhelm them in most departments – cosmetics probably being the exception.
I’m sure Woolworths would love to get rid of its Big W discount behemoth as it continues to rack up losses and announce store closures. I’d be very surprised if there was an Australian buyer with enough confidence to see a stairway up to profitability. It will more likely take a big overseas group with some spare cash and a desire to get a foothold in Australia to knock on Woolworths’ door.
A major factor in favour of overseas buyers being interested Australian retailers is ego. Many big foreign companies see Australia as a naïve market waiting to welcome their superior business talent. Many of them, such as Top Shop and Hollister, have tried, but not succeeded here. Even the mighty Amazon has failed to sweep all before it when opening in Australia.
However, that doesn’t stop big foreign companies from regularly running the ruler over Australian retailers.
Looking at Wesfarmers’ stable I’d guess that Target has been quietly for sale for some time. Once the darling of the former Myer conglomerate, it has taken a dreadful thrashing from Kmart and Big W in recent years and although there are signs that a change of merchandising policy towards stocking second-tier brands might improve its fortunes, the move is still largely experimental. Once again, an overseas buyer would be much more likely than a local.
One virtually untapped area of takeover is in the blossoming online business. As, one by one, big retailers make triumphant announcements about the establishment and percentage growth of online divisions, they have all followed a similar path of internalising it, like the birth of a much-loved baby. None, to my knowledge, has bought an existing online company as a way of acquiring expertise and, albeit it recent, experience.
I know of several under-the-radar on-liners who are just brilliant at what they do. The trouble is, their doors are hard to find even if somebody wanted to knock on them for a preliminary chat. While some colossal prices have been paid for online start-ups, I don’t see apparel websites among them. But it is early days and maybe some time before big retailers will realise that acquisition could make more sense than DIY.