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Myer float a positive bellwether but will private equity investors be the only to profit?


The upcoming Myer float is largely being viewed as a positive sign for the Australian sharemarket.

It is clearly a win for the Texas Pacific Group-led investors, who put up the money, and Bernie Brookes for delivering the rebirth.

It could even be considered a win for the Myer family who are likely to pocket $200 million, if all goes ahead smoothly.

But despite the almost blanket glossy coverage, the effervescent smile of Jennifer Hawkins and the broader appeal of owning a small parcel of an Australian retail institution, I wouldn’t be the first to have my concerns.

On Monday, the refreshingly plain-spoken News Ltd journalist Terry McCrann made the following observation:

That upside is not available for new investors, who – even at the lower end of the float pricing – will be paying a potential premium for success that is yet to be delivered.

Yes, Myer has experienced a remarkable recovery from what Matthew Stevens of The Australian describes as “the grinding, destructive incompetence of at least three generations of the retailer’s management.”

But what now? Is there any upside left?

Kieran Kelly, of Sirius Funds Management, holds a similar view. In a note to Anthill from earlier today, the fund manager expressed the following concerns:

  1. The private equity firms bought the company in June 2006 when it was on its knees for $1.4 billion. They plan to float it with a value of up to $2.77 billion with an enterprise value of $3.1 billion. Has the company changed that much in three years?
  2. The vendors are selling down virtually the entirety of their holding (retaining max of 13%).
  3. The timing follows a 50% surge in the stock market and a 170% lift in the David Jones price.
  4. On projections, Myer will be trading at 17.3x forecast 2010 earnings at the listing price, a similar multiple to David Jones. If it is to give new shareholders a 10% return on listing (reasonable expectation) it will have to trade at around 19x, 2010 earnings. It’s overpriced at 17x – its outrageous at 19x
  5. If DJ’s trades at 17x Myer should trade at about a 10% discount or 15x given the many superior features of the DJ’s business. With a further 10% float discount to appraised value, the Myer multiple should be 13x. Its not. See point 4 above.
  6. If the float gets away at 17.3x, Myer will be at a significant premium to the All Industrials Index and will rank in the top 80 Australian listed companies.
  7. Annualized 2010 dividend yield (and that’s annualized not actual) is around 5% ff. Not enough for an industrial such as this. Would like 6% -7% on listing price.

What he is suggesting is that based on the market value of a comparable company (David Jones), the offer just doesn’t seem to stack up. It smells of opportunism and is most likely over-priced.

While we’re generally big supporters of private equity and other funding sources designed to accelerate company growth, the Myer float does raise concerns often aired when overseas private equity investors get involved in the Australian market.

Did someone say, “pump and dump?”

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