The A$2.15bn deal to buy David Jones, which has 38 department stores, is Australia's largest retail takeover since 2007. Photo: Reuters

JSE-listed Woolworths Holdings has agreed to buy Australian retailer David Jones for A$2.15 billion (R21bn), to expand in a market targeted by global rivals including Inditex and Hennes & Mauritz (H&M).

David Jones shares rose 23 percent yesterday to close at A$3.91 in Sydney, below the A$4 a share cash offer. Myer Group, its main listed department-store competitor, withdrew a merger proposal first made in October last year when David Jones’s shares closed at A$2.71.

Buying the 38-outlet Australian chain increases Woolworths’s presence in a country Credit Suisse says is the world’s second wealthiest.

The deal gives the retailer buying power to compete against global fast-fashion groups including Zara, H&M and Arcadia Group’s Topshop, which are expanding into both Australia and South Africa.

“Those chains are in a global arms race to open new stores now,” Caroline Finch, a senior analyst at Ibisworld in Melbourne, said, adding that local retailers in Australia and South Africa had to work harder, because “the H&Ms and Zaras of this world have been nipping at their heels, taking the attention of a very fashion-focused consumer”.

“We’re buying this business to build a bigger southern hemisphere brand,” Woolworths chief executive Ian Moir said in Sydney yesterday.

“We’ve got real scale in the southern hemisphere, we’ve got the same seasonality, so we’ve got a real competitive advantage over northern hemisphere entrants.”

Southern hemisphere winters fell in the north’s summer, creating a challenge for incoming clothing retailers from Europe, North America and north Asia, Moir said.

The deal, which has already been agreed to by David Jones’s board, is Australia’s largest retail takeover since 2007.

It values the target at about 11.1 times the A$192.7 million in earnings before interest, tax, depreciation and amortisation in the past 12 months. That is a 13 percent premium to the median valuation in developed market retail acquisitions over $1bn in the past five years.

“It does look expensive currently, but they’ve obviously done their sums,” Evan Lucas, a market strategist at IG said, referring to Woolworths.

Woolworths shares slumped as much as 6 percent to R69.10 in JSE trading before closing at R67.90, down 7.58 percent on the day.

Woolworths’s offer was “a decent price which I probably will accept”, Simon Marais, the chairman of Allan Gray Australia, said. The fund manager is David Jones’s fifth-biggest shareholder with a 5 percent stake, Bloomberg data show.

Buying 176-year-old David Jones will give Woolworths control of an upmarket retailer in a country that has the highest wealth per adult after Switzerland, according to Credit Suisse.

“The Australian economy is a little sluggish but this is a strong economy and it will come back,” Moir said. The strong Australian dollar “creates a natural rand hedge for our business in South Africa”.

David Jones, whose sales from stores open at least 12 months have declined in all but two of the past 13 quarters, now stood to benefit should spending from higher-end consumers in Australia rise, Michael Simotas, a Sydney-based analyst at Deutsche Bank, wrote in a February 11 note to clients.

The offer “recognises the potential of the David Jones business, the positioning of the department store here and the value of the property” owned by the Australian company, Grant Saligari, a Credit Suisse analyst in Melbourne, said.

Woolworths already owned 88 percent of fashion chain Country Road in Australia, so “they’ve got experience in this market”, Saligari said.

Woolworths gets about 16 percent of its revenues from Australia, where sales by Country Road have more than doubled over the last four fiscal years to A$706 million in the year to June last year. If the two companies had been combined during their 2013 fiscal years, Australasia sales of R22.6bn would have amounted to about 43 percent of total revenue.

That size would help compete with offshore entrants, Moir said: “You’ve either got to accept that competition’s there and compete with it, or roll over and die.” – Bloomberg