Commentary

 2 Comments

Hawking Myer's wares

Stephen Bartholomeusz

Published 12:04 PM, 8 Oct 2009


Within the predictable debate about the condition, prospects and, critically, the value of Myer there is an interesting tension. Chief executive Bernie Brookes may be doing his best to maximise the exit price for his private equity vendors but he would appreciate that it isn’t in his interests, or that of his senior management, to help pump up Myer’s value to unsustainable levels. Indeed, quite the contrary.

Fund managers have been doing what they always do when a major float is afoot and talking down Myer’s prospects and value. What Brookes has described as "posturing" is what would be expected of aspiring buyers. They are hardly likely to want to talk up the price they will pay.

The most potent argument the fund managers have in their armoury is the ‘pump and dump’ charge – that the private equity firms TPG and Blum Capital that own the vast majority of Myer’s shares, having slashed costs and taken the easy gains, will cut and run before it becomes obvious that Myer’s future is built on foundations that have been winnowed out.

Apart from the reality that TPG would be mindful that it will have other floats to bring to the market in future that view tends to ignore the fact that Brookes and his management will have to live with the value attributed to Myer by the float. That carries with it both reputational and financial consequences.

Brookes’ contract runs until 2012, so he is going to be around to have to face shareholders’ ire if Myer doesn’t deliver the performance and growth he has been promising.

More to the point he, his chairman Howard McDonald and his senior team have a large personal financial stake in Myer’s future performance.

Brookes has committed to retaining at least 90 per cent of his existing stake in Myer, which will be escrowed for 18 months, although he may be able to sell up to 25 per cent of his shareholding after the 2010 full-year results announcement. McDonald will have his entire holding escrowed for 18 months. The senior management team will retain 83.4 per cent of their holdings – 7.7 per cent of the company – until after the 2010 results.

More particularly, Brookes has been granted an incentive package of options valued at $9 million. The options are subject to performance hurdles – 75 per cent of them are dependent on Myer’s earnings per share growth and the remainder its share price growth.

To get all the options Brookes would need to deliver earnings per share growth of 15 per cent a year or more and a share price that is 40 per cent above the float price. For most of the package the period over which performance is measured is the three financial years to July 2012, with the rest dependant on performance to July 2013. The senior executive team also has significant share-based incentives.

In other words, if the Myer float were a ‘pump and dump’ exercise and its post-float experience were disappointing, Brookes and his team would see what could potentially be a very, very significant amount of value disappear. It isn’t in their interests to help push the value attributed to Myer by the float beyond the point at which it is not only sustainable but capable of the kind of growth that would deliver them their incentives.

The institutions are, in any event, more than capable of coming to their own conclusions on Myer’s value.

The indicative pricing for the float is $3.90 to $4.90 a share, or an enterprise value of between $2.7 billion and $3.2 billion. There doesn’t appear to be any dispute that Myer would be good buying at the bottom of that range.

At the top of the range it would be valued on roughly the same basis as arch rival David Jones, which has raised some eyebrows because David Jones is priced to reflect the excellence of its performance in recent years.

However, valuing Myer on the same kind of multiples can be rationalised if the institutions believe it has the potential to grow faster than David Jones from a significantly less mature (in terms of the condition of the business) starting point.

The float promoters can influence the prices fund managers bid into the book build by using what appears to be very substantial retail investor demand to reduce the supply of available stock to the institutions, creating the tension to encourage the institutions to bid aggressively to ensure they gain the volume they are after.

However, there will be a limit to the degree to which the professional investors are prepared to capitalise Myer’s potential. This week’s shift into a new rate cycle, with rates now destined to rise, will also discipline the prices they are prepared to bid.

Myer’s shares will be priced at whatever the institutions think they are worth. Neither Brookes nor his private equity backers can dictate the price level at which the institutional demand accounts for the residual supply after the preferred retail investor allocation has been established.

However, it is clear that the interests of Brookes, his chairman and their management team are actually more closely aligned to the incoming shareholders than those departing. With TPG conscious that the Myer float will probably set the tone – and appetite – for all future private equity transactions in this market cycle, there are at least some counter-balancing influences to the natural desire of vendors to maximise their selling price.


ASX Stock Chart for DJS


|  

2 Comments


David King, director, David King & Associates wrote:

Dear Stephen,

You make a wonderful case for Myer's expected share price in this coming float based on the assumption that if Bernie Brookes can't come up with the goods on the incredible task set before him, so that he can prosper along with the suckers who buy in, then it’s trouble for him. (See Hawking Myer's wares, October 8.)

But, have you never thought to play detective in such a scenario, and look for the possible hidden agenda? Are you seriously suggesting that at the end of the GFC, there is no chance of a hidden agenda that is off-market, off-the-table and might even totally change the picture? Not just here but with any such float? Have you ever seen a person wearing two hats at the same time who did not have a secret loyalty?

Myer is worth $2.90, on the careful analysis of at least two of your colleagues, and everything you have reported is Myer's own special window-dressing-flavoured sauce, so if you are looking at ways Brookes could prosper in such a scenario, then maybe you are looking in the wrong places.

Meanwhile, I appeal to your readers to wait for the market's inevitable reaction before investing in this once great has-been. While waiting, go shopping there, and see if you like the experience. (I am not and never have been an employee or associated in any way with Myer except as an occasional customer.)

8 Oct 2009 2:40 PM

Suwai Hoh, MD, Balmoral Corporate Advisory wrote:

I've just recently wrote an article on a preliminary fundamental valuation of Myer. The article can be found here. It's about a page long but won't fit here. Please do not hesitate to take a look and contact me if you have any queries.

9 Oct 2009 3:06 PM



Contribute to the Conversation

To contribute your comments for possible publication, please Login or Register.

Preference will be given to succinct contributions. We may contact you via email prior to publication.