MYER. Oh dear. Market off 2.2 per cent. My Store off 8.5 per cent. No bloodbath … but not pretty, either. You have to hand it to these private equity boys. They’ve skewered the punters good and hard, and the fund managers too, for that matter, although the latter get paid regardless of performance – and it’s not their money anyway.
It is hard not to admire the chutzpah of Myer’s vendors, TPG and Capital, though. They watched the market bouncing. They knew they had a small window of opportunity when things got hot. They sooled almost every broker in the market into the sales process – locking in their distribution (via broker firm allocations) and muting potential dissenters at once.
The Government had done its bit via the cash splash early in the year, putting a rocket under retail stock prices. Then, just before the market took a turn, and just as the fillip to retail spending from the taxpayer stimulus was fading, the boys lock in a mighty $1.3 billion take. A quintessential private equity three-year-turnaround.
A classic sales job, except that TPG’s confreres in private equity land will not be happy punters this Melbourne Cup day. Nor their mates in capital markets. Myer has spoilt the game for everybody. The retinue of floats in the pipeline such as Ascendia (the old Rebel Sports), Kathmandu and anything else lining up for a dollop of retail support will now struggle.
Even if the market were to promptly bounce, Myer would still struggle to surpass its $4.10 issue price. There is a lot of slippery money waiting to get out thanks to hefty private client allocations from the ”broker firm” component. For the ”stags” that had loaded up for a fast 5 per cent gain on issue day, there are cheaper stocks to buy.
Incidentally, there was a low-grade rumour doing the traps yesterday that the Myer privateers, or associated parties, had been mopping up a few David Jones shares during the pricing period for the Myer offer. The idea being that – as one of Myer’s selling points was its PER (price earnings ratio) comparison with DJs – a strong DJs stock price justified a higher price for its department store rival.
This sales pitch was always a furphy as DJs actually owns its CBD property whereas Myer had flogged its main stores in a sale-and-leaseback deal. This year’s DJs annual report touts a ”permanent $30 million to $61 million cost advantage from owning flagship CBD stores”. The salient word here is ”permanent”. The privateer is not there for the long haul, merely to buy low and sell high.
In the case of Myer, the costs had been stripped out, and the prospect of anything more than 2 per cent revenue growth is relatively remote.
In these circumstances, asking for a PE of 15 times at the issue price of $4.10 was always a bit rich, seeing as 13.5 times has been the historical ceiling for retail IPOs.
Thanks to a dazzling marketing effort, an often gullible press and the willingness of fee-hungry private client brokers to flog anything for a ticket, the privateers and their phalanx of PR people, brokers, ”independent” experts and assorted hangers-on has won the day.
The public has lost – the volume-weighted average price of Myer yesterday was at $3.83 against a closing price of $3.75 – albeit they’ll probably have some good news soon. Ensuring a buoyant aftermarket is a stock-in-trade of the privateer.
Although the business of flogging floats may be subdued for some time as a result of a poor showing from Myer, the market has an acutely short memory. Look no further than the next most actively traded stock yesterday: Boart Longyear. Floated in 2007 at $1.85 a share, ”Borat”, as it is nicknamed, now fetches 27¢. To be fair, JB Hi-Fi springs to mind as a cracking private equity play (for shareholders) but the foul performers outrank the fair by a comfortable margin. And that’s before counting the assets that public companies – the likes of IAG and Babcock – have acquired from private equity and lived to regret.
For the privateers, whose assets are usually geared five times to turbocharge returns and lower tax, the recent market rally has come as a reprieve. But the Myer float, overpriced and overspruiked as it was, has done the industry no favours.