Lew Is Holding Two Hands And Most Of The Cards In Gamble For Just Group

The Age

Tuesday April 1, 2008

Malcolm Maiden

It would surprise if Just's board does not say Premier's offer is too light, and push for more.

THERE are two vantage points to consider Premier Investments' $900 million takeover offer for Just Group from, and Premier's controlling shareholder, Sol Lew, occupies both of them.

Vantage point No. 1, offered by Lew yesterday, is that the outlook for retailers is worsening, and that his 52% controlled Premier is offering Just shareholders, including him, a way to hedge their bets, by taking $2.20 in cash, and the balance in Premier shares.

Vantage point No. 2 is that Lew is bullish again, and trying to get Just Group cheap.

Lew's intel on the retail industry is as good as it gets, and when he says retailers are headed for "a very poor season", as he did yesterday, he can't be ignored.

In their recent first-half result announcements, David Jones chief executive Mark McInness and Myer chairman Bill Wavish both said interest rises and higher prices for petrol and other necessities were hitting consumer confidence and sales in the second half, and Lew agrees.

March should have been abnormally strong for retailers because the Easter sales occurred during the month, he says, but retail sales were weak, and Lew expects April to be as tough, or tougher, because Easter will be missing, and rate rises and food and petrol price rises will still be bearing down on sentiment.

Pressure from official Reserve Bank rate rises in February and March and unilateral rate rises by the banks in response to higher funding costs is intensifying, as the shock of the announcements is followed by increases in debt service costs.

Premier's offer is therefore a form of insurance for Just shareholders, Lew argues. They get the chance to take $2.20 a share off the table and bank it, by virtue of the cash component of Premier's offer, but also retain a stake in Just going forward, by virtue of the share component of Premier's bid, which will hand them one Premier share for every four Just shares they now hold.

Lew can cite his own conditional acceptance of the Premier offer for the 22.8% stake in Just that he owns as evidence that he thinks Premier's "insurance policy" is attractive. The Lew family companies, Metrepark Pty Ltd and Springsand Investments Pty Ltd, will accept if Metrepark's acceptance carries Premier to a 50%-plus stake in Just: if the Lew private companies do sell, they will receive about $100 million in cash, and shares in Premier that would boost Lew's controlling stake in the investment company from 52.4% to about 65%.

But from vantage point No. 2 - inside Premier itself - it looks less like Sol Lew is offering insurance, and more like Sol Lew is bullish again (a sign of some significance for market watchers, given his track record).

Premier sold its 5.9% stake in Coles for $1.1 billion to the Wesfarmers consortium almost a year ago to the day, setting up Wesfarmers' takeover of Coles. But it was still sitting on cash of $779 million at December 31. Lew saw no compelling large acquisitions on the horizon in 2007, because private equity groups had pushed asset prices sky-high during the boom, and, one suspects, because he saw storm clouds gathering.

Asset prices stayed high in the second half of 2007, even as the liquidity squeeze developed, and private equity began to retreat, but the downturn eventually changed the lie of the land. Just shares peaked at $5.88 last November 1, were down to $4.80 by the time investors returned from the Christmas-New Year break, and bottomed out at $3.30 on March 3, which was about the time Lew decided to move.

The slide in the retailer's share price is not exceptional. The whole market has been weak, and Premier said yesterday that since the beginning of October last year and March 28 this year, Just shares fell by 33.8%, and retail stocks in the index fell by 32.7%.

The decline in Just's share price has nevertheless allowed Lew to pitch the bid that is well under last year's record price, but still well above recent trades. The shares-and-cash offer is valued at $4.11 a share based on Premier's weighted average share price in the past month, and at $4.46 a share based on net asset backing, creating premiums of 16% and 25.8% on Just's average price of $3.55 in the past month.

And at that price, he could be looking at a post-Easter retail bargain. The bid is above market, all right - but it is also pitched at a skinny 12.9 to 11.8 times Just's expected 2007-08 earnings of 32? a share to 35? a share if Premier's average price of $7.65 a share in the past month is used to value the share component of the bid, and at a still-lean 13.9 times and 12.8 times expected earnings if Premier's net tangible assets per share of $9.05 is used to value the share consideration.

That's not a huge price to pay for effective ownership - through Premier - of a company that Lew acknowledges is well run, with very fast stock turnover of over five times a year, and a slate of retail brands including Just Jeans and Portmans that are being meticulously maintained in separate demographic categories so as to not cannibalise market share. A measure of Lew's regard is found in Premier's stated intention to retain the services of Just's chairman, Ian Pollard, and the retail group's chief executive, Jason Murray.

Sol Lew and Ian Pollard are due to meet today to discuss the offer, and the Just board will meet later to frame a recommendation. Lew is in the driver's seat, with 23.7% of Just, including his stake and a 0.9% stake Premier has just picked up on market. But it would surprise if Just's board does not say Premier's offer is too light, and push for more.

mmaiden@theage.com.au

© 2008 The Age

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