Myer float is far from a bargain, but market cannot let it fail

Unless you were six foot under in a box, you would have heard a bit about the looming Myer float of late.

The team mascot Jennifer Hawkins was at it again this week urging mums and dads in Melbourne to read the prospectus (that’s the fat bit in front of the application form) before they participated in this iconic investment opportunity.

One wonders whether Our Jen is availed of an Australian Financial Services licence, something the non-supermodel fraternity is required to hold before dispensing advice on investment products.

The marketing extravaganza is designed to bring as many retail investors as possible onto the Myer share register to ”squeeze” the institutions. The private equity promoters from TPG and Blum are hoping the instos will be left ”short”, with as little as 25 per cent of the stock after the float, and then be forced to buy in the aftermarket to achieve index weight.

Besides the ”index play”, there’s another reason for the hullabaloo over Myer. A slather of floats is backed up in the capital markets pipeline. Virtually every new and used share salesman in town has a gig in the Myer sale. That takes the critics out, and it generates a lot of will to succeed.

If this float is a dud there are serious pricing ramifications for the likes of Ascendia (the $700 million to $900 million relisting of the old Rebel Sport), Kathmandu, Link Market Services and a host of others.

The collective will of the brokers and their privateer clients who are flogging these things should ensure a reasonable aftermarket for Myer. They can’t afford it to fail and will prop it up on day one and, thereafter, there will be a predictable flow of good news announcements until the chief executive, Bernie Brookes, and his cohorts can be released from escrow and offload the balance of their shares.

The questions are, is there a ”stag profit” in it (a profit to be made selling in the first week), and can they hold the share price up in the longer term?

While it is true that the institutional investors have been ”talking down” the value of Myer as the privateers spruik the float, and while it is true that it is in their interests to get the price down as far as possible (to buy in cheaply), it is also true that Myer is expensive.

At the top of the valuation range the department store is pitched on the same price/earnings multiple as its tried and true retail rival David Jones – more than 17 times earnings.

Given Myer’s sales have gone backwards over the past two years and, thanks to the usual private equity shuffle, the cash has been ripped out and replaced with debt, and many of the hard assets of any note have been sold, the instos can be forgiven for wondering from where the growth will come. The easy dollars have been made, and they are just about to be banked by a breed of market animal – the private equity investor – renowned for asset-stripping, tarting up notorious underperformers and has-beens, and leaving nought on the table for new owners. Look at the track record: Pacific Brands, Repco, Boart Longyear, Emeco, to name a few. All floated at heroic prices; all ended in grief for shareholders.

Sure, there is a 15 store roll-out in the works for Myer, but that costs money – and then there are the macro considerations. Thanks to the cash splash, Myer is hitting the retail market right at its peak, surfing the wake of David Jones’s success and the remarkable resilience of the consumer in the aftermath of the financial crisis.

This will not last, as rates began heading higher this week and, frankly, equity prices at present levels are not justified

by risk on the corporate earnings and macro fronts.

Over the longer term, then, we are being offered a poor sales growth record in Myer with little upside except for the remote prospect that management may somehow surpass the performance of the sector, by a significant margin. Bear in mind that department stores traditionally struggle to beat GDP growth.

As for the profitability, with savvy management under TPG and its confreres, EBIT (earnings before interest and tax) margins have doubled over the past couple of years. The costs have been taken out. Things are already stretched to the bone.

Myer’s big spend is on marketing its own sale.

That said, the will of the promoters and the brokers, coupled with a smart management team, may throw up a 5 to 10 per cent premium to issue price in the early days. Plenty of hungry share traders are counting on this.

However, they risk a drop in the market and further interest rate increases between the time they commit their funds – now – and the day of issue. If the market keeps running in the meantime, there should be early profits to be made. If it tanks, so will Myer.

Given the ploy to squeeze the instos, who will price the issue (retail won’t know what the price is until the insto bookbuild is done), there could be further upside in Myer should retail demand hold up. According to one broker, clients are getting 90 per cent of what they asked for.

The promoters have something else on their side: that is, a hankering for new issues in a rollicking good market. Sentiment could surely turn on a dime. There have been only a few small floats since the global financial crisis though. And while most of the big caps recapitalised early this year in an unprecedented $80 billion recapitalisation spree just to survive, there is demand for primary issues.

So Myer is a test case for the market. The brokers can hardly let it fail, so there should be no wipeout unless the whole market turns. Yet the prospect of anything more than paltry gains is hardly odds-on.

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