Premier Investments vs Myer – Where to next?

MyerBourkestreetAn opinion piece by Dan Da Silva, Cycam Pty Ltd, a M&A player as an investor / initiator in corporate plays with private equity and trade players.

In announcements made to the market recently, Solomon Lew, chairman of Premier Investments has made very public his group’s views on the need for board renewal at troubled department store company, Myer.

Premier holds 10.77 per cent of Myer and has made calls for more and better “mass merchandise retail experience” on Myer’s board. It wants two board seats – and a further independent director with retail experience appointed –   presumably to guide and improve retail strategy and hold Myer management more accountable for delivering on and improving performance standards it has set itself.

Premier appears to be opposing most key current independent directors. This creates a ‘dead-men-walking scenario’ in the short term. It’s certainly a major distraction for every senior-level employee and supplier at Myer – especially in the critical run up to the peak trading period ahead.

Myer’s current board appears to fully support the two-year-old “new Myer” strategy, seemingly oblivious on the dismal reality of recent performance. It bases its rebuff of Premier on retaining independence in the face of obvious conflicts of interest, with Premier being a major supplier and a competitor of Myer.

The Myer board are ‘dead right’ on the independence and corporate governance argument.

But most remain vulnerable as directors – they are on weak ground with institutional investors due to underperformance and disheartening trends.

Premier says it has “no current intention of making a takeover offer for Myer”.

Of course, “current intention” means nothing – this is corporate speak for “we’ll do anything that we want in the next 10 minutes”.

So, let’s just talk this one through –

  1. Premier thinks it’s a better retailer and it’s probably right there, given Myer’s recent results, but it has also got a ‘glass house’ on its core brands’ performances, so rock-throwing is dangerous.
  2. Premier wants a major say in Myer’s strategy and its execution (orderly racks, etc.), while being a competitor and supplier to Myer, presumably to increase the value of its investment.
  3. Premier has not clarified why it bought and wants to hold around 11 per cent of the company in the first place!

Premier’s comments re buying into Myer “after hearing management talk up the business” does not pass the pub test, when it’s people like Solomon Lew and Mark McInnes shelling out tens of millions on an adjacent retail play. Most would bet they know Myer better than most of its own management.

Surely, Premier never meant to just hold an entirely passive stake – it was either defensive (to have a say on supply and brand positioning – but also, some would say, not too smart in a public company context) or a classic longer term play, as per the game with South Africa’s Woolworths.

Myer seems to be saying that Lew is taking the share price down, and he should put up (with a full takeover) or shut up.

Premier could easily acquire Myer. It has credibility and depth of experience.

It also has firepower – a market capitalisation of over $2 billion (Myer $0.6 billion) and trades at a better Price Earnings Ratio of approximately 19 Times (vs 12.8 X for Myer).

It directly benefits; Premier could re-vitalise and re-position Myer in a way few other local or international players could. There would be significant synergy savings in a more-vertically integrated business, with better distribution for key Premier brands.

But, Premier has a few issues of its own – other than Smiggle and Peter Alexander, its many other prominent brands are feeling the pain of retail malaise. It has work to do on its core businesses.

If a public stoush was meant to reduce Myer’s value for any take-over (a blunt and unlikely strategy), it appears to have failed. The share price has held reasonably steady.

However, a quick and drastic re-rating of Myer’s share price could occur if Premier sells down or sells out fully, and if the sales and profit results for the last quarter continue to show declines.

Premier’s real strategy may have been to simply be a king-maker, and profit-taker, from the acquisition of Myer by another (international) trade player.

Now, its all become personal – with lots of reputational risk. More so with Mr. Lew, as Myer directors have taken the high moral ground.

Never mind the profitability, look at the wonderful governance – they say.

Premier are still saying “no current intention” on a take-over, so that’s shorthand to international trade players…“Guys, any half-decent retailer can make this work better, and we’ll help you make it better as a partner (of one sort or another)”. They even kindly advise that the clearance floors in Myer stores should be closed immediately.

The question is – how will the other 89 per cent of Myer shareholders (and, especially the key institutional investors) act in this situation?

They are caught between a rock and a hard place. They would have conflict-concerns in backing Premier’s bid for its nominee directors, but are under the gun on making decent returns from their holdings in Myer.

The obvious solution would be for Premier to make a cash-plus-shares offer for Myer and resolve the solution for both retail and institutional shareholders. To back itself with real money, rather than just talk.

But that’s almost too bold a move in the current shaky, pre-Amazon-entry retail environment. You’d really, really need to have a vision and locked-in strategy for positioning an enlarged Premier, way beyond the obvious initial financial synergy up-lifts. Steel kahunas, in the parlance of the street.

In summary, the game has probably moved into areas that Premier may not have intended when it bought into Myer in March 2018, but the ball remains in Premier’s court.

Will an international player buy in? Maybe. And that may give Premier what it wants. But, who’d want to enter the fray now? Possibly, it may be more interesting in Jan-Feb 2018 …

So, what of the short term?

Myer directors can sit pretty, even appointing one or two more “retail mass merchandising” people of their choice, to totally blunt Premier’s key arguments.

As institutions are likely to be divided and sit on the fence, and since it’s become a very public game of thrones (i.e., I’m a better retailer than you, and I’ve always been a better retailer than you, you incompetent bunch of consultants, so there!) – Premier will have to:

  1. Put up (stay quietly at approximately 11 per cent) – waiting for trade players and/or private equity to make a play.
  2. Stock up (with purchase of greater / majority control; say, 19.9 per cent now and then possibly creeping upward progressively without triggering a 100 per cent bid), or
  3. Shut up (walk away with a loss, and focus on Premier’s brand issues).

Option two seems to give Premier the best path forward – with the most say and strategic flexibility – for an easily managed, incremental investment, especially if there is a dip in the share price over the next few months.

(This opinion piece and strategic commentary is not investment, securities, legal or financial advice. It represents the personal view of the author.)

Comments

2 comments

  1. Avatar

    Amy Roche posted on November 6, 2017

    Great post Dan and InsideRetail, it is tricky indeed. Lot's of opinions out there, as you mentioned if you exclude Smiggle and Peter Alexander I don't see Premier as a wealth of experiential retailing that's for sure - so even if they did buy the 20 percent I can't see them adding value. I'd love to see Myer turn things around by really embracing a more exciting in-store experience. I loved their approach from last Christmas - but then it seemed to wane in normal trading? Either way, I hope Myer succeeds and I'm hoping Umbers can pull them through. Really informative post, thanks. reply

  2. Avatar

    Dan posted on November 6, 2017

    (This article was written on 25th Oct) - Myer has since announced downtrend in Sales and lowered/halved its performance metrics, with a focus on Sales Per Sq Metre.. This is an easy way out; someone could point out the Board & management are paid for Net Profitability not Sales. They can't quit Leasing commitments for numerous unprofitable department stores without major write downs / cash-losses - surely, a case for a major corporate re-construction looms as value gets crunched?! reply

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