Woolworths takeover of David Jones a corporate chess game

Time’s up for Solomon Lew if he wants to throw a precisely placed grenade at Woolworths of South Africa’s $2.2 billion takeover of David Jones. He had until Tuesday to buy enough shares to block the deal but no large trades in the stock were recorded.

It appears Lew has instead chosen to remain at 9.9 per cent – which won’t be enough to derail the takeover unless there is a groundswell against it from smaller shareholders that either don’t like the price – this is unlikely – or register a protest vote against the scheme – possible but also unlikely.

Given Lew has been closely guarding his agenda his actions – or inaction – on Tuesday are the only guide to his strategy.

Woolworths insists it has had no meaningful discussions with Lew and Lew won’t even comment on whether he has spoken to Woolworths.

He has refused to let the David Jones board in on his voting intentions, so it was probably watching trades very closely on the final day.

While the shareholder vote is not until next Monday the T+3 settlement period creates an earlier deadline to register stock.

Getting the vote across the line is not a lay down misere but if Lew is neutered as a show-stopper, the largest obstacle is out of the way.

One can never discount the possibility that Lew may have his foot on some additional votes through some kind of derivative transaction that would not require disclosure.

This is also looking less likely but is a wildcard that one can’t completely ignore.

If logic prevails Lew will be happy with the outcome to date. His greenmailing exercise has gone according to what we believe is his plan. He has now received a hefty $17 share offer for his 11.8 per cent stake in Country Road – thanks to Woolworths caving in to Lew’s implicit threats and making an offer to mop up the remaining Country Road shares.

It certainly looks as if Lew is getting close to his $400 million-plus pay day.

But the boards of David Jones and Woolworths, both of which are wholeheartedly pushing the David Jones takeover, are working hard this week to ensure this deal makes it over the line.

For its part David Jones is undertaking shareholder proxy solicitation – in other words ringing small retail shareholders, encouraging them to vote and warning them of the consequences of the failure of the scheme to receive approval – including the likelihood the share price will fall.

It is also running newspaper advertisements reminding them of the importance of their vote. Ads and soliciting proxies are not unheard of but they’re tools usually employed when the parties think the vote could be close.

The way the numbers now stand Lew’s 9.9 per cent will almost certainly not be enough to kill the transaction.

However, given roughly 40 per cent of shareholders won’t register a vote, Lew’s stake will account for proportionately more. And this is why David Jones is so keen to get the smaller shareholders on board to register their votes – which will most likely be in favour.

Woolworths has already done the heavy lifting to keep the David Jones deal on track by making the offer for Country Road shares.

By any financial measure the Country Road offer price is extremely generous.

The bidder’s statement for this takeover, which was released on Monday, in part justifies the price by pointing to various synergies around systems, processes, infrastructure and scale. These include opportunities with sourcing (lowering cost of goods) and increasing speed to market, enhanced logistics and amalgamation of service functions.

Woolworths estimates such benefits are worth about $30 million to yearly earnings before interest, tax, depreciation and amortisation.

But it reiterates that the Country Road offer is conditional on getting the David Jones acquisition across the line.

The benefits are still not sufficient justification for the $17 price – and the $4 a share offer for David Jones – but Woolworths needs to sell the deal to its own shareholders.

Meanwhile everyone associated with this two-pronged deal needs it to look as if Woolworths is not paying a ransom to Lew or – in legal speak – that he is not receiving a collateral benefit that other David Jones shareholders are not getting.

Otherwise the finale to this corporate chess game could be the arrival of the Australian Securities and Investments Commission or the Federal Court with a call for it to be aborted.

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