David Jones clarity

Today we received a detailed update from Woolworths with regards to the David Jones acquisition. I'll break it up into 3 important parts namely rationale, funding and progress update.

Rationale

Sasha has covered this in detail before so I am just going to do a standard copy paste from the announcement to remind you.


"As an iconic Australian retail brand, David Jones provides the perfect platform for expansion in Australia, occupying a similar customer positioning to WHL in South Africa at the premium end of the apparel market, with both businesses enjoying strong aspirational brand identities and a strong alignment of values that put the customer first, offering excellent service and quality. The Proposed Acquisition supports WHL's strategy and is a rare opportunity to create a southern hemisphere retailer with meaningful scale, better able to compete with global retailers, leverage common fashion seasonality with enhanced sourcing capability and leverage the South African headquartered design, buying and procurement capability."


There certainly are some good synergies available. Pushing Woolies brands within David Jones stores makes a lot of sense. So does bringing the David Jones brand here to SA. We are huge suckers for foreign brands. The list goes on.

Funding


The total purchase consideration is expected to be R22,351 million. R10bn of that funding will come from both cash on hand (R2bn from their latest results) and a R10bn term facility. The surplus of this cash will also be used to fund current operational cash needs. A A$400 (R3.98bn) bridge loan will be raised in Australia. I am sure the rates in Australia are very favourable. The difference (about R9.4bn) will be raised through equity bridge funding (which uses equity as collateral and will be repaid by a rights issue after the transaction is done). Woolies current market cap is R65bn so the rights issue will look to raise about 14.5% of the market cap from us the shareholders. That is not big at all which is good news. The details of the rights issue still need to be finalised but the recent resurgence in the share price I am sure makes this a lot easier.

Progress update


Both the Australian Foreign Investment Review Board and the Financial Surveillance Department of the South African Reserve Bank have given their approval. Shareholders now need to approve the deal which the board unanimously recommends. David Jones shareholders also need to approve. They assume this will all take place by 17 July when the acquisition will go through. Remember the rights issue will only take place after this.

The Vestact Take


At first we at Vestact were a bit sceptical of the deal. They were getting things very right going about their business and growing organically, why throw such a big spanner into the works? But the more we have looked into it the more we realise we have to trust management on this one. They have done it before and they certainly have the skills and expertise to buy a depressed asset and turn it around. If you are still not convinced watch this interview with CEO Ian Moir he goes into great detail about the acquisition. We continue to accumulate Woolies shares.