Published On: Tue, Jun 24th, 2014

Solomon Lew’s $209 Million Country Road Windfall Unlocks Woolworths Takeover Of David Jones

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Woolworths Holdings of South Africa has disclosed that it is launching an A$17-a-share offer to buy out all the minority shareholders in Australian retailer Country Road. Woolworths has held an 88% position in the company since 1998 when they bid for what was, and technically actually still is, a public company on the Australian Stock Exchange.Woolworths Holdings, which by the way should not to be confused with the huge Australian retailer of the same name Woolworths Ltd, is doing this to achieve twin objectives. First, to finally rid itself this time of entrepreneur Solomon Lew who owns 11.8% of Country Road,  and who had blocked Woolworths Holdings from taking it over 100% when they first bid for it sixteen years ago. Under the form of bid made at the time it would have needed a 90% ownership level to induce a subsequent forecout which they just missed out on.

Second, it is part of an implicit trade-off over something else, as Lew has also recently disclosed he has acquired an interest of just under 10% in another Australian retailer, David Jones, which Woolworths is currently bidding to acquire all the shares of for A$2.2 billion.When it became clear shareholder meeting to approve the transaction might not reach the 75% required threshold at a special shareholders meeting of David Jones, scheduled to take place on June 30th for that purpose, because of Solomon Lew’s investment intervention, the meeting and the vote were postponed untilJuly 14th. The threshold is lower this time as the bid is in the form of a to-be-agreed scheme of arrangement.

Under the newly announced bid to acquire the outstanding minority holdings in Country Road therefore, Woolworths Holdings is now offering Lew a total of A$209 million to sell them his stake. This gives Lew a huge profit, and of course solves a major problem for him there too, as it has been something of a Mexican standoff between them for so many years.

Finally, Woolworths Holdings currently now pending bid for David Jones gave Solomon Lew a superb tactical opening to impose his will, which he seized with aplomb picking up an almost 10% position in David Jones recently for just under A$200 million.

In layman’s terms, to make sure they don’t just get stuck with a pig in a poke twice, this new Woolworths Holdings offer for the Country Road minority is conditional on the David Jones acquisition itself also being completed on schedule.

However, Woolworths Holdings is being careful to state that it has entered into no formal agreements with Lew to buy his stake, or to impose conditions, and that rather it has simply concluded that owning all of Country Road and all of David Jones, at the same time, might just be a very good thing.

Woolworths Holdings also state they have held no meetings with him Lew either, though it seems some general adviser-to-adviser conversations did take place. The Financial Times is also quoting Ian Moir Woolworths Holdings’ CEO, and in the past himself a former manager of Country Road, as saying “In light of the proposed acquisition of David Jones, this is a common sense and timely opportunity to seek to reach full ownership of Country Road.”

It is not clear what Solomon Lew’s cost base for his shares are in Country Road, but his profit is expected to be massive, even after calculating holding costs in what has been a very long hold-period. He will likely clear a small profit on arbitraging his 9.9% holding in David Jones as well, but this will likely be peanuts in comparison.

While most people at Woolworths Holdings will breathe a sigh of relief to get this all done, some of the company’s shareholders may complain of Lew’s effrontery and of the impact his greenmail will have on the company’s overall cost of being in business in Australia.

At least one Woolworths Holdings’ institutional shareholder has already grumbled out loud as a result, and so far today the company’s shares today have slipped by about 1%. If that is the worst it gets that is a small price to pay perhaps for resolving the loose ends in the Australian portion of their empire.

Of course as there are no agreements in place, there is no guarantee either that Solomon will actually go along, or try to induce some further benefit before he is finished. So Ian Moir and his colleagues may be biting their nails a little between now and July 14th, before they know for sure which.

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