Myer stuck in limbo

MyerBourkestreetThe Myer shareholders annual meeting was, in some respects, an anti-climax after weeks of acrimonious engagement between the retailer’s board of directors and its largest shareholder, Solomon Lew.

The Myer board prevailed with the election of its nominated candidates but failed to clear procedural hurdles in the company’s constitution on three proposals.

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In reality, the election of three Myer director nominees was assured by the fact Lew had proposed well-qualified directors as alternative candidates but none of them formally nominated.

However, as a consequence of the decisions of the Myer AGM and provisions in the company’s constitution, Lew does have an option to push for an extraordinary shareholders meeting to potentially force a spill and a new election.

From the sidelines, it would appear that Lew achieved his objective at the AGM and remains a stalking horse to a board and management team that is under mounting pressure to demonstrate that its business strategy is workable in the short-term and sustainable into the future.

New Myer chairman, Garry Hounsell, has claimed victory in the feud with Lew, thanking shareholders for their endorsement of the three company-preferred director candidates, each with around 70 per cent of eligible votes cast in the election.

Hounsell and the board are fortunate that only shareholders received a vote as it would likely have been a very different result had suppliers been enfranchised.

Suppliers and retailers with concession stores have much less faith in Myer management and the retailer’s strategy than the institutional investors who stuck with the board after intense lobbying by Hounsell and his directors.

It would also be true to say that those institutional investors are also running low on confidence.

Many institutional investors agree with much of Lew’s recent criticism of Myer’s direction and underwhelming performance but are not convinced Lew is the white knight to fix the problems.

Hounsell has spent a lot of his personal capital, built up over years as a successful director of many enterprises, in pleading for patience from investors for the turnaround strategy pursued by Myer CEO, Richard Umbers.

He has also risked some of his credibility in defending the make up of the Myer board which is regarded by Lew, analysts, many investors and suppliers to be underweight in retail experience.

IRW understands there was considerable stakeholder support for Lew’s candidate for the Myer board, Terry McCartney, due to his retail experience, which included a period as CEO for Myer Grace Bros between 1995 and 2000.

McCartney, of course, was not formally nominated and might well have been opposed by the Myer board because of his non-executive directorship at Lew’s Premier Investments.

However, McCartney has been seen as a credible board option by some investors, analysts and two other key and concerned stakeholder groups, suppliers and staff.

A McCartney return to Myer as a director certainly has the support of some of the old hands battling to serve customers with depleted staff rosters and merchandise that Myer concedes has a better hope of selling in clearance centres.

Those clearance centres, roundly condemned by Lew, have dismayed and confused many staff and suppliers and are emblematic of Myer’s struggle for sales and earnings against competitors.

The only saving grace for Myer in respect to its relationships with suppliers is that most of them don’t believe that David Jones is doing much better.

The Lew riddle

Lew has kept everyone guessing about his intentions since acquiring a 10.8 per cent shareholding in Myer in March of this year.

One theory is that Lew has taken the stake to protect his apparel supply contracts with Myer, which might be at risk if the department store andHounsell has argued having a major supplier and competitor seated at the board table would be a conflict of interest.

A further theory is that Lew is primed for a takeover offer, albeit his statements since March have dismissed such an intention with the rider “at this time”.

Hounsell claims that Lew’s “public campaign of hostility” appears to be self-interested, partially revealed or secret and “appear intended to drive the share price down” against the interests of shareholders.

Hounsell suggests Lew wants to take “effective control of the board and the company without paying for it”.

The third theory about Lew’s intentions is that he wants to ensure he is a player if a takeover bid should emerge from another party, a move from his playbook on a previous occasion.

Lew bought up shares in David Jones to deal himself in to the takeover by the South African retailer, Woolworths, and pocketed a tidy profit from accepting the final offer from Woolworths for his shareholdings in both David Jones and the Country Road group.

Few would believe it, but there is also the more benevolent theory that a sentimental Lew simply wants to see Myer succeed with a turnaround in its fortunes and to rebuild it after burning close to $2 billion in enterprise value since November 2009.

Lew ahead of the game

Irrespective of the motives at this point, Lew won the tactical battle at the 2017 AGM of shareholders and has Hounsell’s board of directors and management in an invidious position.

By not formally nominating his alternative candidates for the Myer board, Lew would have known that a majority of shareholders would vote for Hounsell’s team

Shareholders would not have wanted to vote against the Myer preferred candidates, creating uncertainty in a critical trading period when there was no alternative candidate for whom to vote.

Lew suggested three viable and accomplished candidates but would not have wanted to take the risk of them being defeated in the election, a rebuff that would have diminished his clout going forward.

In a masterful play, Lew voted down the adoption of the remuneration report, as well as constitutional changes for hybrid AGMs allowing online participation by shareholders and a takeover protection.

Lew has also set the scene for a total spill of the board at a future shareholder meeting, a move which underlines the value of not burning his three recommended candidates for the board, McCartney, investment banker Tim Antonie and retail property executive Steven Sewell.

The 2017 AGM has provided a hollow victory for Hounsell and his board with its two new directors, JoAnne Stephenson and Julie Ann Morrison, under significant pressure to demonstrate that Umbers is the right man as CEO and has a business strategy that will work.

Hounsell and Umbers both pleaded for patience from Myer shareholders at the AGM, pointing out that turnarounds in struggling businesses can take years.

The problem for them both, however, is that Myer has been in turnaround mode for the best part of two decades, almost dating back to the departure of McCartney.

While hopeful for some Christmas cheer and new year celebrations, Umbers last week warned that the retail environment remains challenging and sales for the second quarter have not improved thus far on the 2.1 per cent same store decline in revenue in the first three months of FY18.

Umbers remains wedded to his turnaround strategy, including the clearance centres and further contraction of the store network, but he and the reconstituted board may like to reflect on why concession stores within Myer are in positive sales growth territory.

It is this writer’s experience that you can at least find someone to serve you in the concession outlets, someone who knows the merchandise which is available in a coherent range.

Try to find a Myer employee – even with the help of concession staff searching for them – and that is not to blame the employees.

Lew has put the Myer board and management on notice and institutional investors can also expect to feel the heat, unless Myer delivers on Hounsell’s brave assurance that he wants to “turbocharge” the whole transformation program.

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