Woolworths to buy David Jones for $2bn

Woolworths Holdings is set to buy Australias second-largest department store for $2bn.

Woolworths Holdings is set to buy Australias second-largest department store for $2bn.Picture: Sebabatso Mosamo/EWN.

SYDNEY - South African retailer Woolworths Holdings Ltd is set to buy Australias second-largest department store David Jones for $2 billion, trumping a merger proposal from Australian rival Myer Holdings Ltd with a hefty premium.

The deal, the biggest for Woolworths to date, creates a leading southern hemisphere retailer that will benefit from greater scale and a common fashion seasonality. It also provides David Jones, which has seen profits decline for the past three years as competition from overseas players heats up, with more expertise in online offerings and private brands.

Resilient consumer spending, fuelled by a strong local currency and record low interest rates, has encouraged the likes of Swedens Hennes & Mauritz, and Japans Fast Retailing, the operator of the Uniqlo clothing chain, to set up shop in Australia.

The view that we take as a business is that the department store isnt dead - mediocrity is dead, Woolworths Chief Executive Ian Moir said at a briefing in Sydney.

In short, were buying this business to build a bigger southern hemisphere brand.

Woolworths, an upmarket retailer, offered A$4.00 per share for David Jones. That represents a 25 percent premium to its closing price on Tuesday and a 40 percent premium to its close on January 30 when the Myer offer was made public.

This makes a huge amount of strategic sense, they can afford to pay a high multiple, said Commonwealth Bank retail analyst Andrew Mclennan.

Woolworths profits have grown 20 percent annually in the past five years on investments in product development, tighter inventory management and through onlines sales, and the company plans to bring this expertise to David Jones, Moir said.

He estimated that the company could add at least A$130 million annually to David Jones bottom line within five years.

David Jones posted an annual profit of A$95.2 million in the last financial year.

Woolworths Holdings, which has no relationship with Australian supermarket chain Woolworths Ltd, already has experience in the Australian market, owning 88 percent of upmarket clothing retailer Country Road Ltd as well as another clothing chain Witchery.

It said it would finance the deal with debt, cash and equity fund raising. It does not plan to reduce jobs at David Jones after the takeover, it added.

David Jones was advised by Gresham Advisory Partners Ltd, Macquarie Capital and law firm Herbert Smith Freehills. Woolworths was advised by Rothschild and Standard Bank.