What did Myer have to say to David Jones about its merger proposal?
Below is a letter addressed to David Jones chairman Peter Mason from Myer chairman Paul McClintock.
The letter was sent and released on the ASX on February 20.
Dear Peter,
I am writing to inform you that Myer Holdings Limited (“Myer”) has today announced it has reached an agreement to re-appoint Bernie Brookes as Managing Director and Chief Executive Officer (“CEO”) of Myer, and to reiterate our willingness to engage collaboratively with David Jones Limited (“David Jones”) on the unique opportunity to merge our companies in order to create significant value for our respective stakeholders.
We are re-appointing Bernie to provide clarity about the leadership of Myer.
Bernie would also be available to lead the combined company should the merger occur and should we jointly agree that he should be the ongoing CEO, providing us both with at least one option for that role.
For complete clarity, our proposal was designed to ensure that ‘social issues’ are not an impediment to a transaction. Specifically, this would mean jointly agreeing the Chair, Board composition, the CEO and other senior management roles, head office location and corporate name. Bernie’s reappointment will not change this in any way.
We remain convinced that the rationale for a combination of Myer and David Jones is highly compelling, creating a sustainable, more competitive retailer and delivering significant value for the shareholders of both companies. We believe there is strong support for the strategic rationale from the investment community.
You have raised concerns about whether our proposal of an all stock nil premium merger is fair and attractive for your shareholders. We don’t see how it cannot be. There are four key points that I would make in that regard.
First, the transaction would be a true merger of equals, with neither party taking or ceding control of either the ‘social issues’ or ownership, and with the gain in value from
what we believe to be very significant cost synergies of more than $900 million1 essentially shared equally between both sets of shareholders.
Second, our nil premium proposal does not mean that the two companies are valued equally – David Jones already trades at a significant price earnings multiple premium to Myer – but it does accept that the prices put on both companies by the market over a significant period are probably about right. If your board believes that the market has mispriced the two companies to such an extent that it should be reflected in the merger ratio then perhaps that view could be explained and factored into our discussions.
Clearly if our joint review throws up evidence that one party is contributing more than its share to the value creation, then that evidence could be reflected in the final terms. However, the final terms should not merely be driven by which company has done the work to get the proposal off the ground, in circumstances where neither party is giving up or obtaining control.
Third, we accept the synergy analysis which underpins the potential value gain is subject to confirmation and requires a review by us jointly. However, we have undertaken an extensive independent assessment of the synergy opportunity and execution risks with the help of a global expert on the retail sector, and we are as confident as we can be about our conclusions in the absence of discussions with you. This includes the plan to keep operating Myer and David Jones as separate, stand-alone, department store brands.
We note that our estimate of more than $85 million per annum in cost synergies2 represents 1.8 per cent of combined costs (defined as Sales less EBITDA) which is in line with precedent department store combinations such as Federated / May where the stated cost synergies were 1.7 per cent of combined costs.
We would welcome the opportunity to share with you our views on the amount of the synergies, including more details on the breakdown by cost category, and the reasons for our confidence.
Finally, we acknowledge that any merger transaction of the scale we have proposed will have commercial, market, business and regulatory risks (including the ACCC clearance process). Based on our extensive preparation we are confident that the commercial, market and business risks are manageable and that the transaction would enhance competition. We would also be pleased to share with you our analysis and preliminary implementation and integration plans to allay your concerns on such matters.
In conclusion, we genuinely believe our proposal of an all stock nil premium merger to unlock such substantial synergy value was and still is both fair and compelling for our respective shareholders, with manageable risks. And the agreement to re-appoint Bernie as CEO of Myer provides us with both certainty of leadership from a Myer perspective and an option to lead the combined company.
That being said, we cannot progress our proposal without your agreement and support.
We would welcome the opportunity to engage with you to explore whether we can achieve a mutually acceptable transaction. To that end, in addition to the points raised above, we are open to discussing the transaction structure, including the basis upon which your property portfolio could be separated out from the department store business were this considered to be in the interests of your shareholders.
In the interest of the market remaining properly informed on this matter, a copy of this letter has been included in our ASX release today.
I look forward to hearing from you.
Yours sincerely,
Paul McClintock
Chairman
Myer Holdings Limited