Woolworth Merge Case

1. Executive summary

Since the commencement merger activities in 1994, marking the largest amount of deals on a global basis, numerous companies around the world have shown huge appetite for merger and acquisition of others (Hopkins 2002). Although cross-bordermergers represent a small percentage of all merger activities, they are considered the growing part of all direct foreign investment. This report evaluates the acquisition proposal from Woolworths Holding Limited, a South African retail group towards David Jones, an established Australian retail channel. The analysis highlights the logic and rationale of the proposed deal through the corresponding economical and market research and a discounted cash-flow method (DCF) to obtain the standalone and the merged entity. With the additional discussion on possible risk, shareholders activism, regulatory issues, and managerial or behavioural economic theories, a recommendation was made as to accommodate the progression of WHL’s takeover deal.

1.1 Acquirer and Target Overview
Woolworths Holding Limited (WHL) is a South African retail group, holding a series of food and clothing stores with a number of premium brands, such as Country road, Witchery, Mimco, and Trenery (Woolworths Holding 2014).

On the other hand, David Jones (DJ) is Australia’s leading premium department store with a unique positioning in Australian market. DJ is a channel retailer that offers the best national and international brands across categories such as fashion, accessories, beauty, home, and food. Apart from the strategic department stores locations in Australia’s key urban and central business districts, DJ also offers an online shopping service. During the year ended 30 June 2013, DJ holds 10% of the Australian retail market share (ASX 2014). DJ has a strong brand and domestic presence in Australia in fashion, food, and electricity market.

2.Strategic rational of the deal

2.1 industry analysis

After performing industrial analysis, the retail industry in Australia has generally grown strongly over the past decades with clothing, household goods, and food taking over more than 50% of the industry turnover. NSW and Victoria also takes more than 50% of the industry turnover by state (Savills 2014, pp. 9).

However, this industry depends heavily on the macro-economic and market conditions. In times of economic uncertainty, retail industry in considered as a defensive investment. Changes to the general economic conditions in Australia or internationally may affect Woolworths’ and DJ’s assets and liabilities, and the share price. For examples, fluctuations in currency exchange rates, interest rates, and inflation could affect the retail business and thus the incomes; wages growth will also increase expenses.

Unpredictable change in customer preference and an increase in household savings could affect the industry as well. The sales of the business highly correlate with the fashion trends and the GDP. Other factors such as growth in technologies and internet result in the development of online shopping service. This has not only increased the competition within the industry, but also resulted in greater transparency of global pricing. Hence, it has a good barrier to entry for new entrants, since brand loyalty is low and cost leadership takes place. A wider range of brands and products from online services are accessible now, which possess a bigger threat to both DJ and Woolworths.