David Jones's board is standing by its endorsement of South African retailer Woolworths's $4.00 a share takeover offer, even though an independent expert has found that David Jones shares are worth as much as $4.14.
Independent expert Grant Samuel & Associates has valued David Jones shares at between $3.73 and $4.14 a share and says Woolworths takeover offer is fair and reasonable and therefore in the best interests of shareholders.
In valuing David Jones shares as high as $4.14, the independent expert is believed to have taken into account the value of David Jones's property portfolio if development opportunities were exploited.
The four CBD stores are in the books at $612 million, but analysts believe they may be worth as much as $1 billion if air rights above the stores are developed. Grant Samuel is also believed to have applied a higher multiple to David Jones's earnings than analysts have applied used the past and also took into account a premium for control.
David Jones shares were trading around $2.75 and were considered fully valued by most brokers before Myer approached the company last October with an all-scrip merger of equals proposal that valued the shares at around $3.11. The stock was trading around $3.21 before Woolworths, South Africa's largest retailer, approached the board offering $4 a share cash in April.
The board quickly accepted the Woolworths offer, subject to no superior offers, and is standing by its decision. David Jones said on Thursday the offer price was within the expert's range and represented a substantial premium over the David Jones share price before the offer was made.
Furthermore, in the absence of the Woolworths offer or any alternative offer it was likely that under current market conditions the shares would be trading at prices well below $4.
"The David Jones board continues to unanimously recommend that David Jones shareholders vote in favour of the scheme at the upcoming scheme meeting, in the absence of a superior proposal," the company said.
Grant Samuel said the $4 a share offer represented a substantial 25 per cent premium over the share price prior to the offer.
This premium was "reasonable" but towards the lower end of the standard range, the expert said.
However, in Grant Samuel's opinion, the premium based on prices up to January 30, when the Myer offer was revealed, was more relevant.
"These are undisturbed prices and are a better reflection of where David Jones shares would trade in the absence of a takeover offer or any speculation as to one," the expert said.
"On this basis, the Woolworths offer represents very substantial premiums for control (circa 35 to 40 per cent)."
David Jones chairman Gordon Cairns has previously said that the board weighed up the Woolworths proposal against the value that could be created through David Jones's five-year plan. It came to the conclusion that the offer was worth significantly more than David Jones's intrinsic value and brokers' valuation.
Woolworths is believed to have initially offered less than $4 a share but was convinced to lift its offer to $4 a share to win board approval.
Mr Cairns has also said that the board would be willing to consider other offers if one of the global retailers eyeing Australian expansion came along.
No counter-bidders have emerged, although analysts believe that other potential suitors would likely wait until after the Woolworths's shareholder meeting next month before they made a move.
David Jones shareholders are due to meet to approve the Woolworths offer on June 30 after the Federal Court cleared the way for the scheme of arrangement to proceed.
The Australian Foreign Investment Review Board cleared the way for the merger two weeks ago and Woolworths gained South African Reserve Bank approval last Friday.
The deal will create the second-largest department store chain in the southern hemisphere and one of the top 10 such retailers in the world, with combined sales of $5.7 billion from more than 1151 stores in 16 countries.
Woolworths has identified synergies worth $130 million a year within five years – mainly by increasing the level of private label merchandise in David Jones stores from 3.5 per cent to at least 20 per cent.
Woolworths has also opened the door to selling off David Jones's four CBD stores – a move that would reduce the cost of the $2.15 billion acquisition.
In a circular to Woolworths shareholders last week, the food and clothing retailer said it intended to "review alternatives" with respect to David Jones's freehold property assets once further information became available.
This represented a subtle change in Woolworths's position since it unveiled the offer.
Woolworths chief executive Ian Moir has previously said that Woolworths has no plans for the property assets and has denied that Woolworths was considering a sale and leaseback of the stores to help pay for the acquisition.
Woolworths's wording in the official circular gives the company "wriggle room" to sell or redevelop the properties at some point in the future.
David Jones shares closed down 1¢ at $3.94 on Thursday.