Shares of Lew’s fashion group Premier (PMV) Investments Ltd. have jumped 26 percent this year as new stores from the U.K. to Singapore increase revenue. After selling stakes in two Australian retailers, Lew has at least A$734 million ($643 million) in cash and is looking for targets. Myer Holdings Ltd., part of the company that pushed the billionaire out 12 years ago, is now so cheap after a plunge this month that Lew has almost nothing to lose from a takeover, according to Shaw Stockbroking Ltd.
A deal would hand Lew control of Australia’s largest department store chain and add 66 shops to Premier’s domestic footprint. Even if he paid an almost 26 percent premium for A$1.1 billion Myer, Premier’s earnings would climb, according to data compiled by Bloomberg. Lew and his deputy Mark McInnes, the ex-head of rival David Jones Ltd., may be able to widen Myer’s profit margins by negotiating cheaper store leases and sweeter deals with
suppliers, said Morningstar Inc.
“You’d have to argue that if any management team could turn it around, they could,” Daniel Mueller, an analyst at Morningstar in Sydney, said by phone. “The deal could be quite accretive.”
Solomon Lew, Chairman of Premier Investments Ltd.
A representative for Premier didn’t return calls and an e-mail seeking comment on any potential bid for Myer. A spokeswoman for Myer declined to comment.
Director Fight
Lew had been a board member at Coles Myer Ltd. for 17 years, including four years as chairman, when a spat with his fellow directors over the company’s strategy forced him out in 2002. When he left, Coles Myer was the largest retailer in Australia. Myer has since separated from the company, and listed its own shares in 2009.Lew is now chairman at Premier. He has a 42 percent stake in the Melbourne-based company, which owns clothing brands Just Jeans and Portmans, as well as the children’s stationary chain, Smiggle. Analysts project Premier’s profit will increase every year through at least 2018, according to estimates compiled by Bloomberg.
Signals Mounting
Speculation that Lew may pursue Myer began in July, when he cashed in his investments in local chain Country Road Ltd. and David Jones, Myer’s main competitor. His windfall from the two sales totaled A$421 million. Separately, Premier had cash and equivalents of A$313 million on its balance sheet as of July, according to data compiled by Bloomberg.Lew declined recently to comment on Myer as a potential takeover target.
“We’re always on the lookout for opportunities,” he said Sept. 17. “Hopefully, in the not-too-distant future, we’ll be back to our shareholders telling them that we’ve been able to make an acquisition.”
Myer, also based in Melbourne, has become a more affordable target in recent months. Before today, its stock had slumped 21 percent since Sept. 11, when the company posted a drop in annual profit and said the cost of doing business is rising. The gulf between the earnings valuations of Myer and Premier hasn’t been this wide since the middle of 2012.
“I wouldn’t be surprised if he’s looking at Myer, looking at the performance, looking at the valuation, and thinking, ‘I could probably do a better job and could get the asset at the moment relatively cheaply,’” Greg Smith, head of research at Sydney-based Fat Prophets Pty, said by phone.
A proposal that gives Myer (MYR) shareholders stock in the enlarged entity may help persuade them to accept a deal, he said.
Possible Offers
Premier has the ability to structure an offer several ways and still boost profit immediately, according to data compiled by Bloomberg. In the last decade, acquirers have paid an average premium of 26 percent for Australian retailers.A cash bid of A$2.44 for each Myer share -- almost 26 percent more than last week’s close -- would raise Premier’s earnings per share this year by 43 percent. An all-stock offer at the same level would deliver a smaller boost to profit, yet saddle the group with less debt. A proposal of cash and equity in equal portions also would add to earnings at that price.
“You can definitely make it earnings accretive,” Sean Fenton, who helps manage about A$1.6 billion at Tribeca Investment Partners Pty in Sydney. “It probably comes down to how much debt you could put into any transaction.”
No Risk
Myer’s free cash flow, which was A$142.5 million in the retailer’s latest fiscal year, would be enough to repay the costs of Lew’s takeover, said Scott Marshall, a Sydney-based analyst at Shaw Stockbroking.“It would be a self-funding acquisition and essentially no risk at these prices,” Marshall said. “It’s a very strong cash generator, irrespective of what you think about the business model.”
Combined, Myer and Premier would boast scale that’s hard to achieve without acquisitions, said Smith at Fat Prophets. Last year, Myer had proposed merging with David Jones before the chain was bought by Cape Town-based Woolworths Holdings Ltd., which also bought Country Road.
Diverging Idea
Buying a chain of large department stores would be a departure from Lew’s current strategy. He has built up a collection of individual fashion brands that are sold in dedicated stores. Premier oversees almost 1,000 outlets in Australia and New Zealand and said it plans to roll out more Smiggle shops in the U.K., Singapore and Malaysia.Still, the fit may be too good to pass up. Among potential acquirers, no one would understand Myer better than Lew and McInnes, said Mueller at Morningstar.
McInnes oversaw a fourfold surge in David Jones’s stock price while he was chief executive officer from 2003 to 2010. Premier’s stock price has more than tripled since the end of 2008 through last week. By contrast, Myer has fallen about 50 percent since its 2009 initial public offering.
“You’ve got this dynamic duo with some very deep department-store experience,” Mueller said. “If ever they were going to have a crack at one, this is their chance.”
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