Is Myer Holdings Ltd the next takeover target in the retail sector?

The share price of Myer Holdings Ltd (ASX: MYR) is inching up this morning on renewed speculation that the embattled department store owner will be forced to merge with one of its rivals in a marriage of convenience.

In Myer’s case, it could be more about a marriage of necessity given the gloomy outlook for the stock, which has shed nearly half its value in the past year despite this morning’s 0.4% rise to $0.64 following a report in the Australian Financial Review questioning whether a merger between Myer and arch-rival David Jones is back on the cards.

Both department stores were mulling a $5 billion merger four years ago that would have created a combined group with greater market and negotiation power. The estimated cost savings of $85 million a year.

Cost savings of such a magnitude would come in very handy now given Myer’s string of profit downgrades, although David Jones isn’t in any a better position.

David Jones was eventually sold to South Africa’s Woolworths, which has all but admitted it paid too much for the retailer as David Jones’ sales have also fallen off the proverbial retail cliff.

Myer’s management has brusquely brushed aside talk of any merger as it undergoes a management reshuffle, but there is no doubt that Myer is feeling the most heat in the retail sector and management may be forced to do a deal.

It isn’t only David Jones that could be a potential suitor. There are quite a few desperate brides/grooms around as the department store sector in Australia is shrinking.

Macquarie Group Ltd (ASX: MQG) estimates that department store sales have fallen to just 6% of total retail spend from 14% in 1985.

There is speculation that US retail titan may consider buying a bricks and mortar retailer in Australia to help its expansion in this market, and Wesfarmers Ltd’s (ASX: WES) Target store chain might make an ideal… ermm “target”.

One shouldn’t forget the struggling BigW chain owned by Woolworths Group Ltd (ASX: WOW) either.

But desperate times make for strange bedfellows as they say, so one shouldn’t be too dismissive of any prospective tie up between Myer and other besieged department stores.

The new Myer could be a listed holding company made up of a few types of retailers, and that isn’t a crazy idea. Just ask Solomon Lew with Premier Investments Limited (ASX: PMV). Mr Lew is also agitating Myer for some corporate action, so Myer’s chairman shouldn’t expect the pressure to ease anytime soon.

However, I certainly wouldn’t be buying Myer on the back of any merger hopes. It is particularly complicated getting a Myer marriage to work.

If you are looking for big opportunities, you are better off reading a free report prepared by the experts at the Motley Fool on a sector that is tipped to make a big splash in 2018 and beyond.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Premier Investments Limited and Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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