Woolworths to buy Australia's David Jones

The combination will create a southern-hemisphere juggernaut and equip both retailers to compete with fast-fashion icons such as Zara‚ Topshop and H&M‚ which are making inroads in both South Africa and Australia.

Woolworths CEO Ian Moir said on Wednesday the transaction would provide it with the scale and opportunity to deliver significant benefits to its shareholders and customers in South Africa and Australia.

"The combination will create one of the world's largest department stores with meaningful scale‚ able to leverage common fashion seasonality with enhanced sourcing capability‚" he said.

David Jones‚ also known as DJs‚ is one of Australia's oldest and most prominent department stores. It operates 38 stores across that country and owns its flagship stores in Sydney and Melbourne.

Woolworths has operated in Australia for more than 15 years through its subsidiary Country Road Group‚ which operates the Country Road‚ Trenery‚ Witchery and Mimco brands.

The deal is expected to deliver synergies of at least R1.4bn a year in earnings before interest and tax within five years.

"Each business will be well equipped to compete with global retailers in their respective markets‚" Moir said.

Proposal

Under the proposal‚ David Jones shareholders will receive A$4 cash per share‚ which represents a 25.4% premium to the share's closing price on April 8.

The transaction is to be implemented through a scheme of arrangement between David Jones and its shareholders.

David Jones CE Paul Zahra said Woolworths' proposal "recognises the attractive outlook for David Jones‚ including the benefits that have and will flow from the continued implementation of our future strategic direction plan".

Its board of directors has unanimously recommended that shareholders accept the offer‚ subject to an independent expert concluding that the scheme is fair and reasonable and in the best interests of David Jones shareholders.

Woolworths said it intended to fund the offer consideration via a combination of existing cash‚ new debt facilities and equity funding to be raised by an underwritten renounceable rights offer to be launched soon after the transaction is completed.

To fund the transaction at completion‚ Woolworths had secured an equity bridge facility that would be repaid with the proceeds of the proposed rights offer. The funding required had been underwritten by Citi‚ JPMorgan and Standard Bank.

Approval pending

Woolworths would also seek approval from its shareholders for the acquisition‚ as well as other approvals related to the proposed rights offer. The deal is expected to be completed in July.

Its offer trumped that of Myer Holdings‚ another Australian firm‚ which in October proposed a nil-premium all-stock deal that valued David Jones at A$1.4bn.

Earlier this year‚ Woolworths said it wanted to continue to grow its fashion credibility‚ stretching its brand across categories and geography.

Along with more competitive prices‚ the retailer has invested heavily in new systems and established a merchant academy to train its buyers‚ planners‚ technologists and designers.

"Centres of excellence

It has also identified global "centres of excellence" in China‚ Bangladesh‚ India‚ Madagascar and Mauritius to drive innovation and product differentiation‚ aided by better relationships with suppliers.

The group has ramped up its clothing procurement strategy‚ allowing it to shorten lead times‚ as it focuses on a quick-response model.

The arrival in South Africa of global retailers has also seen other local groups such as Truworths‚ Edcon and Foschini increase efficiency.

Woolworths can now get to the market in just five to seven weeks with more than 30% of its goods‚ where previously it took more than 11 months to get to market.

"Our merchandise cycle is quicker than it ever was. We are faster to the market and we continue to trade in season‚" Moir said.

Country Road‚ Woolworths' 88%-owned subsidiary‚ concluded the acquisition of 40-year-old fashion retailer Witchery Group from Gresham Private Equity for A$172m in October 2012. Woolworths will try to emulate the success it has had with Country Road and Trenery in South Africa‚ with Witchery and Mimco.