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Should Myer buy David Jones Limited?

The recent news that department store Myer Holdings Ltd (ASX: MYR) made an approach to rival David Jones Limited (ASX: DJS) regarding a possible merger of equals has cast the two retailers into the headlights of investors.

While investors will be weighing up the scenarios under which they could profit, the news has also opened the door for shareholders to now enter the fray (and rightly so) and air their opinions on what should happen next.

One of those shareholders is fund manager Allan Gray which has a 5.3% holding in David Jones. Dr Simon Marais, portfolio manager at Allan Gray, has encouraged Myer to continue pushing for an outcome – potentially by launching a takeover. His argument centres on the structural issues facing the department store sector and the need for consolidation.

Recent History

In the past 12 months David Jones has certainly been the better investment. David Jones’ share price has gained 21.4%, while Myer’s has fallen 3.6%. In contrast the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) is up 3.9%.

Extending the time frame out to five years however and David Jones’ outperformance vanishes. Over the past five years the stock price is down 45.6%, Myer’s is down 36%, while the S&P/ASX 200 Index is up 10.4%.

A review of each retailer’s results explains these falls. Over the past five years, David Jones’ total sales, sales per square metre, profit after tax, earnings per share and dividends are all significantly lower. Similarly Myer’s sales, profits, earnings per share and dividends are all lower since its initial public offering in late 2009.

Foolish takeaway

With potential synergies – reportedly to the value of $85 million – available from combining Australia’s two leading department stores, a merger would appear to make inherent sense. However, whether Myer has the balance sheet capacity, or its shareholders the stomach for accepting significant dilution for a takeover is another matter altogether. This story may have a way to run yet.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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