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Woolworths closes turbulent chapter in Australia by selling David Jones

Woolworths closes turbulent chapter in Australia by selling David Jones
Sydney shopppers walk past David Jones Market Street Department Store on August 12, 2014 in Sydney, Australia. (Photo: Lisa Maree Williams/Getty Images)

Woolworths plans to sell David Jones to an Australian private-equity firm for an undisclosed amount. Woolworths bought David Jones in 2014 for R21.5bn. It is reportedly selling David Jones for R1.5bn, meaning that it overpaid for the business, and significant value has eroded over the past eight years. Woolworths is not completely leaving Australia. 

Woolworths plans to cut losses with its problematic Australian department chain, David Jones, by selling it and for potentially a song. This is another stark reminder that the grass is not always greener in Australia as Woolworths becomes another South African company that has been burnt Down Under. 

Woolworths announced on Monday 19 December that it will sell David Jones to Anchorage Capital Partners, an Australian private-equity firm, for an undisclosed amount. Both parties are still finalising the terms of the sale, which remain confidential.  

Local media in Australia and Bloomberg have reported that Anchorage Capital Partners will buy David Jones from Woolworths for between A$120-million and A$130-million (up to R1.5-billion). 

This would be substantially less than the R21.5-billion that Woolworths paid to buy David Jones in 2014, a move that pushed Woolworths into Australia to create “a leading southern hemisphere retailer”. David Jones was supposed to be transformative as it would also propel Woolworths to become one of the top 10 department store chains in the world.

Woolworths is not completely exiting Australia as it is not selling Country Road Group, its other retail business based in the country. Another South African company, Murray & Roberts, a construction and engineering firm, is also facing troubles in Australia and wants to exit the country. 

In a briefing with journalists on Monday, Woolworths CEO Roy Bagattini refused to be drawn into details about how much David Jones would be sold for, saying the terms of the deal will be revealed when it’s concluded in March 2023. 

Bagattini struck an upbeat tone, saying although the David Jones investment over the past eight years has been “painful” for Woolworths, he was “excited” about the sale. But Woolworths shareholders have had little to smile or be excited about in many years because they have repeatedly urged management to cut losses with David Jones. After all, it has eroded value on many fronts. Despite this, Woolworths, mainly former CEO Ian Moir and the brainchild of the David Jones deal, told shareholders to be patient for a David Jones turnaround story.  That story never came for many years.

Value eroded for shareholders

David Jones struggled to generate sales for many years at its more than 40 stores in Australia and New Zealand because consumers have been ditching department stores for online shopping and the country’s economy has been sluggish. David Jones also scored its own goals, as poor fashion choices at its stores meant that consumers were increasingly drawn to its competitors. While sales were dwindling, Woolworths had to pump a lot of money into David Jones, paying for its debt and leases for stores. 

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All these problems led to Woolworths writing down the value of David Jones by two-thirds or about R14.3-billion on its purchase price of R21.5-billion. This means that Woolworths overpaid for its bold leap Down Under and has lost more than half the value of its initial David Jones investment since 2014. And if Woolworths sells David Jones for R1.5-billion, it would be further evidence that it overpaid for the business. 

Woolworths shareholders have not been spared this nightmare. When Woolworths completed the David Jones acquisition, its share price was trading above R105 and the investment community rendered it a retail darling. Its shares were trading at a narrow range of R67.40 and R68.51 on Monday, meaning that R37-billion has been wiped off its market capitalisation in eight years. Woolworths, a JSE top 40 stock, has featured in the worst performers list since 2016.

A David Jones turnaround 

To soothe investor wounds and concerns, Bagattini said the sale of David Jones is designed to give Woolworths “a clean exit and optimise value” for the company. There would be no writedowns related to the sale, said Bagattini, adding that the sale will remove about R17-billion in liabilities from its balance sheet relating to running David Jones stores. 

Since taking over as CEO from Moir in February 2020, Bagattini has attempted to improve the performance of David Jones by restructuring its debt, selling off property, and closing underperforming stores. Bagattini’s efforts are starting to pay off. Sales are returning at David Jones as the company is now profitable. Woolworths is no longer sending cash from South Africa to Australia to support David Jones. Instead, Woolworths is getting cash from David Jones as it repatriated R1-billion from the business during its 2022 financial year. 

Despite the David Jones turnaround, Bagattini said the business is no longer the right fit for Woolworths.

“The structural economics are somewhat fragile here, this business needs extensive amounts of investment going forward, not only in its store portfolio but also in terms of its online business and its back-end system capabilities. 

“That capital just doesn’t work for us, that sort of investment. We can now, as management, invest our time and effort into other businesses within Woolworths,” he said. DM/BM

 

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