David Jones and Myer merger talks simmer as ACCC keeps close eye

After knocking back an approach from Myer in October 2013, David Jones is reportedly set to start talking to its core rival to investigate the details of a potential $3 billion merger.

The move comes as the future of David Jones’s chief executive Paul Zahra is under question; amid rumours he may not resign from the retailer despite announcing his intention to do so last year, and just after a clean out of the board of three of its directors was announced.

It also follows Myer’s move on Thursday last week to re-appoint Bernie Brookes as chief executive officer and managing director, beyond the original conclusion of his contract in August this year.

In a statement, Myer chairman Paul McClintock said if a merger were to unfold with David Jones, Brookes would be “at least one option” for the role of CEO for the new company.

Brookes said, should this happen, he could “commit to presenting myself as a potential CEO for the merged entity”.

David Jones is believed to be talking with Myer about details of a possible merger in coming weeks, according to The Australian Financial Review.

The AFR reported that sources close to David Jones said the retailer is “not opposed to a deal in principle”. It said the David Jones board is waiting to see evidence Myer is willing to offer a suitable price.

On Thursday last week, David Jones released a statement to confirm it had received a letter from the chairman of Myer reiterating its interest in a merger between the two companies.

“The board of David Jones is considering the letter and will respond to Myer in due course and update the market accordingly,” it said.

“The board confirms that it will consider any proposal which is on terms that are in David Jones shareholders’ best interests.”

Investors are currently pricing an offer at $1.8 billion, according to reports, at a ratio of 1.3 Myer shares for every David Jones share.

SmartCompany contacted David Jones this morning to confirm if it will be meeting with Myer, but no response was received ahead of publication.

If merger talks progress, Australian Competition and Consumer Commission chairman Rod Sims said at a CEDA conference in Sydney on Friday that it would be closely scrutinised.

“The ACCC has no idea whether such a transaction will eventuate, and we will only devote our scarce resources to it if it does proceed,” he said. 

“It does, however, illustrate the complexity of merger analysis. Indeed, were it to proceed, the ACCC would have several likely areas of focus for review.

“The ACCC would look closely at the fact that David Jones and Myer are currently the only traditional or conventional department stores offering a variety of mid to high end range consumer goods in the Australian market, and therefore prima facie appear to be each other’s closest competitor.”

He explained a review would take into account the effect of a merger on specialist retailers such as fashion, furniture and homewares stores, where the department stores are offering the same products.

The department stores online operations would also come under review, Sims said, as well as the competition between the two retailers in terms of attracting concession stand operators within their stores.

“They have both become a ‘house of brands’ and appear to compete to attract businesses such as cosmetics retailers, fashion labels, eyewear and other specialities to operate concessions within their department stores.”

Another factor would be the competition between the two for key anchor tenancies in the CBD and regional shopping centres for prime retail space.

Retail Doctor Group director Brian Walker told SmartCompany he thinks talks will be held between the two.

“We are not big enough in Australia to have two premium department stores, and online operations, and international brands and the growth of specialty retailers,” he says.

“Regardless of the personalities involved, they should talk…the fact they re-appointed Bernie Brookes, who is an excellent CEO and retailer, shows Myer are serious about this.

“The potential $85 million cost saving proposed is just the tip of the iceberg…they are both pouring millions into their online operations to get them past 1% of sales…one dollar spent is better than two.”

Earlier this month, David Jones announced it would overhaul its board of directors, with chairman Peter Mason and director Leigh Clapham set to step down from their roles in coming months. Director Steve Vamos has also resigned from the board.

David Jones reported Jane Harvey would take the role of deputy chair of the board, with a process underway to appoint three new directors.

The move followed shareholder and media uproar after Clapham and Vamos were linked to controversial trades which occurred a day after a merger proposal by Myer and ahead of higher than anticipated sales figures. The trades were investigated by the Australian Securities and Investments Commission, with no evidence of insider trading found.