Myer test case for market

If it rains on Myer’s parade, many other floats will be in danger of sinking. Photo: James Davies

UNLESS you were six foot under in a box you would have heard a bit about the looming Myer float. 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 on to 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.

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 has a gig in the Myer sale. It takes the critics out and generates 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 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 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 where the growth will come from. The easy dollars have been made, and they are just about to be banked by a breed of market animal, the private equity investor, which is renowned for asset stripping, tarting up notorious underperformers and has-beens, and leaving nought on the table for new owners.

Look at the 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’ success and the remarkable resilience of the consumer in the aftermath of the GFC. This won’t 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 track record in Myer with little upside except for the remote prospect that management might somehow surpass the performance of the sector, by a significant margin. Bear in mind department stores traditionally struggle to beat GDP growth.

As for the profitability, savvy management under TPG and its confreres has doubled EBIT margins 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 broking community, coupled with a smart management team may throw up a 5-10 per cent premium to issue price in the early days. Some hungry share traders are counting on it.

They risk, however, 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 the price 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: 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 GFC, 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.

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

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