Top-secret mission down under

Woolies adopted code names to keep David Jones deal from prying eyes, writes Adele Shevel

Woolworths' pursuit of Australian retailer David Jones was shrouded in secrecy, complete with code names to prevent price-sensitive information leaking out.

El Alamein was the code name for the deal targeting Australia's second largest retailer, and was kept under the radar for over a year.

It was named after the famous battle in North Africa, widely regarded as the turning point in World War 2 when the Allies could see the Middle East was no longer in immediate danger. Woolworths meanwhile somewhat cheekily awarded itself the code name Winston Churchill.

The R21.4-billion acquisition by Woolworths of David Jones, announced this week, will transform Woolworths from a top-tier South Africa company into one of the largest department store chains in the southern hemisphere and one of the 10 largest in the world.

According to Woolworths, it will be the southern hemisphere's second-largest department-store operator after Brazil's Lojas Americanas SA.

"We have a southern hemisphere advantage. We have competitive pricing, fashionable on-trend product cycle," said Woolworths CEO Ian Moir.

It will entrench the company in the Australian economy, which has had 22 successive years of growth. And the deal, one of the biggest foreign deals for a South African company, encapsulates the ambitions of local companies wanting to expand outside of the muted domestic market.

"If we can create big scale across the southern hemisphere we can get better prices and be more competitive than Zara or H&M," said Moir.

"I think it's hard to do two hemispheres - some are so big like Zara so they can do it - most of the other big northern hemisphere guys coming here will find it tough to do contra-seasonal fashion. We will concentrate on the southern hemisphere and leave the northern hemisphere to the northern hemisphere operators."

Moir spent half of this week explaining to South Africans what David Jones is all about, and telling Australians what Woolworths is all about. He describes David Jones as the mirror image of Woolworths: they have the same customers, the same value set and are seen in the same iconic way.

So there have been about five trips to Australia in the past 12 months, including twice in the past six weeks, with Moir making the call to the chairman of David Jones less than three weeks ago.

Australia's largest retailer, Myer, had put in an offer for David Jones, or DJs as it is known in Australia, at $3 a share in scrip. But where David Jones's board was unenthusiastic about the Myer offer, it has given unanimous support to Woolworths.

DJs's share price surged more than 22% on the news, while Woolworths dropped more than 8% to close at R67.90 on the day. This suggests the market is still digesting the implications and sees the deal as expensive and risky.

Woolworths is financing the acquisition using existing cash and new debt facilities. Renaissance Capital downgraded the stock from a buy to a hold on the news. Woolworths is offering A$4 a share, a 25% premium on DJs's share price on Tuesday. The deal equates to about a third of the value of Woolworths' market cap.

Moir was not anxious about the Myer deal a few months ago, saying his heart sang because he did not think the offer from Myer would go through - no premium was offered. It now meant the company was in play.

Moir visited every David Jones store, looked through every category and every brand. He knows which products and brands he would bring in from South Africa.

"This will be great for SA Inc. This is taking South Africa to Australia. It will create more jobs.

"Much of the opportunity is in driving the margins between the two groups, and will allow for David Jones to tap into Woolworths' improved operations and inject David Jones with more fashionable products."

The local retailer turns around 60% of product in 90 days or less, and has increased margin by five percentage points over five years. It has product development facilities in China.

Moir, who had been actively looking for a way to expand in the southern hemisphere for over a year, had jetted off to Brazil, but decided quite quickly it was not a market the company wanted to move into. Barriers to entry are high. It has taken Zara 15 years to build a business there.

Retail formats are different, the taxation systems are hard, duties are difficult and the legalities of doing business are complex. So it was clear that Australia was where they were headed, and David Jones was clearly what they were after.

David Jones has had a tough time recently as have other retail chains such as Myer, facing growing online competition from online retailers and foreign retailers - which is why Myer proposed a $3-billion merger.

H&M opens its first store in Australia this week, following Zara, Victoria's Secret and Topshop.

Marks & Spencer is also considering moving into Australia.

This is the latest in a surge of corporate deals in retail in Australia as foreign chains increasingly look at expanding Down Under.

Woolworths is fighting fit - its share price has nearly touched highs and operations are streamlined and well managed.

So how did the approach take place? Moir made the call to the DJs chairman just three weeks ago. He jetted off to Australia to meet the management and put forward the deal.

He strongly dismissed suggestions that the company was redirecting its interests away from Africa to Australia, and said it would not affect growth opportunities in Africa.