Myer and David Jones – A Shotgun Wedding?

Despite an early lapse in judgment from the Board of David Jones, the proposed merger of Myer and David Jones has been forced back to the table for proper consideration and negotiation.

While David Jones has until now appeared to be a recalcitrant bride driven by the heart rather than the head, there are many reasons that a merger of the two businesses should be entertained. The first one sits with investor motivation involving two share prices with high downside risk on shareholder value with little upside opportunity to balance it. If nothing else, a merger will shake up the share price of both parties.

The second consideration is one of competitive position. The department store marketplace in this country is overdue for structural change and that is being forced upon us through the entry of new players and new technology changing the distribution paradigm. It is the world’s worst kept secret that Harvey Nichols will be opening at least one store soon, Marks and Spencer are in the final stages of planning, John Lewis and even Debenhams are reviewing their options to enter. K-Mart has re-drawn the lines and Target will – sooner or later despite who ends up owning them – will fight back.

In a well thought through strategy, Myer could be used to cover Marks and Spencer, Debenhams and the upper end of Target and K-Mart, leaving David Jones to become a sharper competitor to Harvey Nichols and any other international premium department store targeting this market.

The third consideration is one of internal change that needs to occur within both Myer and David Jones to restructure them both to be able to better compete with the reality of the twenty first century marketplace. With the ability to be able to quarantine merger “restructuring costs” as a one off extraordinary item, cost savings (synergies) could be more easily achieved without hitting the current accounts and impacting share price.

Additionally a merger would allow the businesses to change their culture in order to align them more clearly with consumers, suppliers and the new distribution paradigm in order to optimize the profit potential for the business in the medium term.

Arguably the shotgun is being used by investors to drive the two parties to the altar. Whether they get there in the end will be dependent on a range of complex factors and the structure of the deal making sense to investors.

But in country that is way over-supplied with department stores and landlords who are beginning to make the transition towards the shopping centre model of the future where they do not rely on department stores to drive foot traffic, this is a welcome debate at the very least.

We just hope that the couple fall in love and bring about the structural change in the market that will allow all of us to live happily ever after.