David Jones Limited (ASX: DJS) released a statement Thursday addressing an Australian Financial Review column proposing a 1.4-to-1 share trade “union” between David Jones and Myer Holdings Limited (ASX: MYR). David Jones thinks otherwise.
The company stated that “[i]f David Jones is approached with a proposal which is in the best interests of its shareholders and has the prospect of realising value for them, David Jones will inform its shareholders in accordance with its listing rule obligations. David Jones is not currently in discussions with Myer in relation to any such proposal.”
The company did mention that Myer approached it in October 2013 with a potential offer to swap shares at a zero premium exchange ratio (1.06 Myer shares per David Jones share).
However, David Jones’ directors ultimately rejected the offer, on the basis that the trade would have introduced significant commercial, market, business, and regulatory risks, including the ACCC review process for the transaction to even take place. David Jones would’ve had to divert company resources “with great uncertainty as to the final outcome and the potential to result in diminution of value of the David Jones business.”
Since the proposal never passed beyond a confidential invitation to engage in further discussion, David Jones didn’t disclose any details to shareholders. For the moment, at least, it seems the price is not right for David Jones to trade Myer shares.
Activist investors and engaged media have an important role to play in the financial world, but David Jones is probably right to hold off on any Myer union. Even at a price as high at 1.4 Myer shares to David Jones, the allure of diversification may actually be “diworseification,” a term made famous by legendary investor Peter Lynch.
David Jones is doing fine on its own, and recently took a major bite out of Myer’s sales when it posted online-only specials during a week-long Myer website crash following Boxing Day. Even Myer’s chief executive Bernie Brooks admitted David Jones had the upper hand, noting that it was a smart move “to capitalise on the fact that we were offline.”
While a week-long website outage should hardly change a long-term investing thesis, the fact remains that David Jones knows what it does best – and a clever stock swap sale just isn’t necessary.