A big crowd spills into Myer for its 5.00am Boxing Day sale opening.

Analysts say a merger between Myer and David Jones wouldn't deliver the savings Myer claimed. Photo: Penny Stephens

Analysts say that Myer’s merger approach to rival David Jones was driven more about concerns over the future of the retail industry than any growth opportunity and wouldn’t have delivered the savings Myer expected from the move.

Myer confirmed on Friday that it approached David Jones with a confidential non-binding, indicative merger proposal on October 28 and said David Jones formally rejected the proposal on November 27.

In the meantime, two David Jones non-executive directors bought 32,500 shares in the retailer with the approval of David Jones chairman Peter Mason.

Myer said it believed the merger would have delivered compelling value for the shareholders of both companies, as well as providing strategic opportunities to grow both brands.

But the board of David Jones declined the opportunity to engage with Myer on the proposal.

Citigroup analyst Craig Woolford believes Myer's approach demonstrates concern about the future of department stores, not a growth opportunity.

"The merger proposal once again focuses on reducing costs for both, rather than growing sales." he said.

Myer, which was advised by Bain Consulting and Goldman Sachs, believed a merger could have achieved more than $85 million of ongoing annual cost synergies within three years, creating the potential for more than $900 million of value to be shared by Myer and David Jones shareholders.

However, analysts have questioned the value of the synergies and raised doubts about whether they could be retained, especially if Myer and David Jones were forced by the competition authority close some of their combined 115 stores.

Citigroup’s Mr Woolford estimated synergies of $ 30 to 40 million from merging head office, back-end systems and store closures, while working capital could reduce by $30 million.

"We doubt the synergies would be retained," he said. "Aligning the two teams would lead to a smaller sales base, taking away a large part of the synergies."

Citigroup says the retailers would have to close as many as ten stores, and landlords would likely take a tough approach on exiting leases, which typically run for ten years.

"Exiting leases will cost significant money."

Myer chairman Paul McClintock said the retailer had been reviewing  a range of strategic initiatives to strengthen the company’s competitiveness.

As part of this review one option considered was a merger with David Jones and significant analysis was undertaken over an extended period leading to an approach being made.

The confidential, non-binding, indicative proposal was conditional and also subject to regulatory approvals, due diligence and the unanimous recommendation of the David Jones board in support of the transaction, Myer said.

Under the proposal, which is believed to have valued David Jones at about $1.5 billion, the merged company would have run Myer and David Jones as separate , iconic department store brands that would have been better equipped to compete effectively in the changing retail market.

Myer and David Jones would have more clearly differentiated offers and the two brands would have provided an enhanced merchandise assortment, brand portfolio, and exclusive and private label offering, Myer said.

The merged company would therefore have appealed to a broader customer base and would be able to give customers greater choice and a better shopping experience.

The combined group would have generated pro forma sales and earnings before interest and tax in 2013 of approximately $5 billion and $364 million, before any cost synergies.

A merger between David Jones and Myer would also struggle to get approval from the competition regulator, Deutsche Bank analyst Michael Simotas said.
‘‘As is usually the case, the outcome would come down to the definition of the market. We wouldn’t rule out the ACCC defining the market as the ‘premium department store sector’, in which case, there are only two operators and approval would be unlikely,’’ Mr Simotas said.
But if somehow the two department stores did merge, Mr Simotas said the two brands would need to be maintained, like Bloomingdale’s and Macy’s, to prevent revenue considerable leakage.

He doubted whether the merger would create value for Myer shareholders.

"Even with $50 million in synergies and no premium we estimate a merger would be earnings per share neutral  for Myer shareholders but highly accretive for David Jones shareholders," Mr Simotas said.

About $100 million in synergies would be needed for an EPS neutral deal for Myer shareholders if a 30 per cent premium was offered.

Myer said the merger could also have provided opportunities to maximise the value of David Jones’ property assets.

The property assets were revalued from $400 million to $600 million last year, but analysts believe they may be worth as much as $1 billion if the four Sydney and Melbourne CBD properties were redeveloped.

"Myer and its advisors believe that the transaction would have enhanced competition as it would have enabled the merged entity to more effectively compete in what is now a globally competitive market," the company said.

"The merger would have further assisted Myer’s existing strategy in addressing the structural shifts in retail internationally, including consolidation, segment specialisation and the growing impact of online shopping on traditional department store markets."