In this op-ed, Ragtrader founder Fraser McEwing dives deep into demerger talks around Premier Investments.
One of Solomon Lew’s many business talents is in creating advantageous suspense when a deal is on the table. But this is not the case with the mooted demerger of the Premier Investment retail businesses. He has intimated that the detail in presenting a plan to investors needs intensive review. In other words, a thorough baking before he takes it out of the oven to serve.
That hasn’t stopped the financial media from speculating. Among many commentators, the bravest is probably international investment bank, Morgan Stanley. It has suggested that the combined total value of the company would go up by nearly 50 percent if each component brand were cut loose. But that has not sent the market into a buying frenzy. After an initial uplift on the demerger news from around $20 to $25 its share price has hovered there as investors wait for the covers to come off the proposal. Morgan Stanley has also made a stab at what the shares of the component companies might be worth if floated separately on the share market. Of course, there is no certainty of a demerger to this extent. Some brands could still be grouped.
There are both excellent and ordinary performers in the demerger basket. The apparel standout is slumber-wear specialist Peter Alexander. It has built a massive, loyal customer base that has broken clear from the peloton of nice-but-not-exciting sleepwear brands. It also has strong growth prospects internationally. Morgan Stanley estimates it could be worth $14.58 per share.
Jay Jays has a good grip on the slippery youth market with trendy styling and keen pricing. As a standalone vertical retailer, Morgan Stanley values it at $9.36 per share but then gives the same price rating to Dotti and Just Jeans. Dotti is in the highly competitive sector of the market and up against the fire-power of Cotton On and Supre. It is generally on trend and is handily, if not spectacularly priced. So Morgan Stanley might be a tad optimistic there. But where I’d disagree with Morgan Stanley is the same share valuation for Just Jeans. Denim has been doing it tough for at least the last two years. It is no longer on trend for the youth market, leaving it to fathers and grandfathers to buy it – maybe to recall their diminishing youth. Just Jeans may, in fact, be currently running below break-even.
Although Smiggle retails children’s stationery and accessories rather than apparel, it is still part of the Premier wholly owned Just Group and will undoubtedly play a major role in a demerger. Like Peter Alexander, Smiggle is a market leader, with a substantial international presence. It has 135 stores in Australia and 180 dotted elsewhere around the world, of which the UK accounts for 100. It’s universal appeal to children, largely through vivid colour, will undoubtedly see it expand further. Morgan Stanley estimates its standalone share price would be $9.89. If you were buying on potential, this seems a little low to me.
There doesn’t seem to be much comment on the other two brands in the Just Group: Portmans and Jacqui E. Portmans is doing battle in the overcrowded 20s to 35s budget market which brings it up against some of the Mosaic brands along with many others. On the other hand, Jacqui E is well placed in the moderately priced young mums market and appears to have a loyal following.
If the demerger takes place and Premier decides to offload some of the poor performers, Portmans and Just Jeans would be early candidates for the guillotine.
Now we get down to one of two elephants in the room, Myer. Morgan Stanley values Premier’s 29% holding in Myer at $10.80 per share. That’s a bit of a mystery to me. Although the current CEO, John King, turned Myer from a loss to a profit in his six years at the helm, he is due to retire early in 2024. The outlook on department stores worldwide is murky and this extends to Myer. Its current value is still showing a loss on Premier’s purchase price, so where’s the justification for $10.80? If Premier extends its interest in Myer to a full takeover, Solly Lew might have an undisclosed plan to make it great again, but on current prospects, there is a question mark over the wisdom of Premier’s 29% holding.
The other elephant is one I’ve talked about before: the effect of crippling interest rates on apparel sales. I’d expected the downturn to come before this, but come it will. Already there is a sale frenzy going on which signals to me that apparel retailers are shaking in their boots. My belief is that households will be forced to direct their spending towards keeping a roof over their heads and putting food on the table before buying clothing. If they do buy, they will probably look for a change in brands to those that are lower in price but still make the wearer look fresh and fashionable.
In that climate, Premier’s demerger could suffer in value to the point where it might be postponed. In order to save face, Premier could blame an ongoing delay on the complexity and cost being revealed by its review. This would certainly hold water when you think of the massive reorganisation necessary to make a demerger work. You must allow for the fundamentals like capital requirements, business plans, management structures and separation costs. Interest rates leading to constrains on apparel retailing sales will have to be taken into account too, and could cancel out a tipping point.
In the meantime, there is plenty to keep Premier busy. It is a big business, with 9000 employees worldwide headed by 42% stake holder, Solomon Lew, one of Australia’s cleverest business men. Even though Solly is in his late 70s, he still has fire in his belly and loves the corporate poker game.
Pictured: Solomon Lew