ASX 200 retailer and Myer shares rocket on 'significant opportunity' to combine powers

These two retailers could be combining forces and investors appear very happy.

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Myer Holdings Ltd (ASX: MYR) shares are rocketing higher today.

In morning trade, the department store operator's shares are up 20% to 77.5 cents.

This follows news that the company has tabled a proposal to fellow retailer and major shareholder Premier Investments Limited (ASX: PMV).

Its shares were up as much as 7% to $32.10 in early trade on the news.

What's going on with Myer and Premier Investments shares?

This morning, Premier Investments announced that it has received a non-binding, indicative, and conditional proposal from Myer to explore a potential combination of the department store with Premier's Apparel Brands business. The latter comprises the Just Jeans, Jay Jays, Portmans, Jacqui E and Dotti brand.

According to the release, the combination would see the department store acquire Premier's Apparel Brands business in exchange for the issue of new Myer shares.

The businesses would be contributed in proportion to their maintainable EBIT and on the same EV/EBIT multiple.

In addition, the Apparel Brands business would be contributed together with sufficient cash to ensure a consistent capital structure for each of the two businesses and to provide Myer with capital to invest in growth initiatives.

The deal would also bring an end to Premier Investments' shareholding in Myer. It notes that Premier would distribute all of its shares in Myer to shareholders. As a result, Premier would cease to own Myer shares and Premier shareholders would become Myer shareholders directly, whilst also retaining their existing Premier shareholding.

What's next?

The proposed transaction would require approval by Myer's board and shareholders, Premier's board and shareholders, and be subject to ASX, ACCC and ATO engagement.

The good news for Myer is that Premier Investments' chair, Solomon Lew, appears to be in favour of the transaction. He has indicated that he would be prepared to take an active role as a non-executive director of Myer if the transaction proceeds.

Premier Investments has stated the following in regards to the proposed transaction. It said:

Myer has indicated that it sees significant opportunity from a combination of the businesses and that it wishes to explore whether that opportunity can be realised as part of a current review of Myer's operations.

Premier also believes that there may be meaningful opportunity for both businesses from the proposal. The proposed combination has the potential to deliver a step change in Myer's scale and market position, deliver synergies and drive sustainable earnings growth.

Premier shareholders would benefit given Premier's existing shareholding in Myer and because Premier shareholders would become shareholders in Myer.

Premier Investments has stated that it will be considering the proposal. However, it has warned that there is no certainty that the proposal will result in a binding offer or transaction.

In the meantime, it continues to work towards the proposed demerger of Smiggle, and to explore the demerger of Peter Alexander.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Premier Investments. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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