Is someone about to make $2 billion buying DJs?

An opportunistic buyer might be about to make a fortune

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Long-term David Jones (ASX: DJS) shareholders had some rare good news this morning, with news that the company's board had been approached by an as-yet unnamed UK entity with an unsolicited offer for the business.

The one-paragraph announcement was unsurprisingly brief, with no information released on any valuation from the would-be acquirer and the company's board advising that the information received was insufficient to allow a formal consideration of the offer.

David Jones would be an attractive target for a cashed-up acquirer, who believed the company still had a reasonable chance to flourish despite the online and overseas competition, and comes hot on the heels of speculation of a private equity play for Billabong (ASX: BBG) and recent moves on Echo Entertainment (ASX: EGP). Buyers are certainly coming out of the woodwork.

A nice kicker

David Jones has significant property assets, which an acquirer would likely sell for a quick cash return – as was the case with the Myer (ASX: MYR) purchase and re-floatation in recent years.

The property is on the books at over $400 million – but some analysts are speculating it could be worth $1 billion.

With every likelihood that retail will recover in the coming years once consumers start to spend again, a purchaser would be planning to then sell or re-float the business.

After taking an initial cash return from the property portfolio, it's likely that a buyer would then seek to relist David Jones onto the ASX, taking advantage of any upswing in consumer and investor confidence to sell a company with higher profits into a market paying a higher multiple of earnings.

Anatomy of a private equity play

In (hypothetical) numbers, here's how it might play out.

David Jones was this morning selling for $2.55 – 12 times next year's consensus forecast earnings of 21 cents per share.

The company had $460 million of land and property on its balance sheet. The acquirer might plan to sell all of the land, and take a few hundred million of almost-immediate gain.

Knowing that investors value companies on multiples of earnings, the acquirer would gamble that the property sale won't hurt David Jones' attractiveness to investors.

The acquirer holds the company for a few years, making some improvements and waiting for the retail recovery to take hold. The result of both factors might lead to a return to historic earnings per share of 30 – 33 cents, plus a little more for the improvements made – let's call it 35 cents.

Lastly, instead of a pessimistic market paying 12 times earnings today, the acquirer gets to sell DJs at 16 times earnings to an optimistic market in a few years.

Foolish takeaway

Adding all of that up, the acquirer sells 35 cents of earnings at 16 times – meaning a sale price of $5.60, and they get to keep the few hundred million in property sales on top of that.

If they bought the company at today's price, they'd turn a $1.3 billion purchase into a $2.9b sale, plus property proceeds of, say, $400  – $900 million. Not a bad way to make $2 or $2.5 billion!

If you're in the market for some high yielding ASX shares, look no further than our"Secure Your Future with 3 Rock-Solid Dividend Stocks" report. In this free report, we've put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.

More reading

Scott Phillips is an investment analyst with The Motley Fool. He holds shares in David Jones. You can follow Scott on Twitter @TMFGilla. Take Stock is The Motley Fool Australia's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691).

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »