A while back, Woolworths announced that it would be making a bid for high-end Australian retail chain David Jones. The deal is a fairly promising one for Woolies, which has done good things with the Australian lifestyle brand it previously purchased, Country Road. However, there are quite a few obstacles to overcome before the deal becomes a reality, the first of which is shareholder approval. In order to proceed with its takeover bid, Woolies needs to get 75% of David Jones’ shareholders on board. Woolies is offering a nice premium, and is sure to persuade at least some shareholders that the deal will benefit them, but one man could scupper the whole deal. In this interview, we get some inside scoop on how one man, Solomon Levy, might be able to derail the whole deal. – FDÂ
ALEC HOGG: Thanks for staying with us and if you haven’t pushed up that volume, just turn on the knob a little bit louder, because this is a really interesting discussion coming up now. Arthur Karras from Old Mutual is one of the veterans in the investment field and he’s been following the Australian department store operator David Jones, which has postponed its shareholder vote on the proposed $2bn takeover by Woolworths of South Africa. The vote’s gone out, just by two weeks, to mid-July but there’s a lot of significance behind it. Welcome to Arthur, who’s in fact, Senior Portfolio Manager at Old Mutual Investment Group Macro Solutions. Arthur, I republished on Biznews yesterday a piece I wrote in 2002. I was in Australia at the time and had the chance to follow up close, the fight that was going on then – 12 years ago – between Solomon Lew and a chap called Michael Kroger who was his Pit Bull, and Woolworths from South Africa. That was over a business called Country Road. Well, it seems as though they haven’t mended any bridges yet.
ARTHUR KARRAS: No, they haven’t. In fact, there are three points at which Solomon Lew is involved in this picture. The one is that he owns about 12 percent of Country Road. Woolworths owns the rest, so there’s an existing relationship there, to which you’ve just referred. One of his retail businesses also supplies goods to David Jones, which they sell on so he will be a supplier to Woolworths via David Jones when this transaction goes ahead, and he’s recently purchased about ten percent of David Jones that he’s made public. He’s also rumoured to own about another five potentially, through some derivative structures so there are three angles to this story.
ALEC HOGG:Â Tell us about Solomon Lew.
ARTHUR KARRAS: He’s one of the richest men in Australia. He’s a billionaire. He is a retailer, so he’s experienced in the retail business, he owns about 40 percent of a company called Premier Investments, and he’s a significant investor in his own right, so there’s a number of different entries that he has into the Australian retail business. He’s also known as someone who’s not afraid of a fight, so he’s managed to prevent Woolworths from owning 100 percent of Country Road and he’s well known for not being averse to getting into a scrap.
ALEC HOGG: Why does he have this vendetta – it seems – against Woolworths of South Africa?
ARTHUR KARRAS: He clearly doesn’t like the way they do things, but he benefitted enormously from retaining that stake in Country Road. Country Road has done extremely well since Woolworths took over, so it’s been a great benefit to him. He might be trying to get a better price for his Country Roads stake. Woolworths has repeatedly gone back to him to try to buy him out, so this might be a way for him to get an angle on that and say ‘well, I’ll let you have my stake in Country Road, but I want a better price for it. I can make life difficult for you here because I now own a stake in David Jones, which you also want to take out’. That’s probably the most likely think that he’s trying to do. Alternatively, it’s simply a bit of green mail. He bought a big stake here; he might just be trying to squeeze a higher price out of Woolworths for his David Jones shares, and get a bit of a trading profit that way.
ALEC HOGG: Alternatively, it might just be very personal. He doesn’t need the few million or hundreds of millions even, that he might be able to squeeze out of Woolworths, so it just seems as if there could be something a lot deeper.
ARTHUR KARRAS: There could be.  We do know about the history of it, but exactly how he’s planning to do that… He would need to own more shares to block the deal absolutely, and because of the nature of the transaction, it’s been cast as a ‘scheme of arrangement’. It means that once Woolworths have the votes, David Jones will be delisted and he won’t be able to stay on board as a minority, so unless he has some other angle on it…unless he can block the deal in totality, he’s not going to be able to prevent Woolworths from going ahead.
ALEC HOGG: How likely is that or what are the probabilities that he could block the deal given that he owns around ten percent and he has that other five percent – as you say – tied up in derivative structures?
ARTHUR KARRAS: Woolworths needs 75 percent of shareholders who vote at the meeting, for it to go ahead, so it’s a question of numbers – how many shareholders show up on the day – and apparently, Australian shareholders are quite lazy about voting their shares so it’s really a question of simply ‘what is the number of people that go ahead’. I think that Woolworths’ management has been quite astute in not going ahead with the deal. They’re clearly saying ‘listen, we can’t walk in here and not know the outcome’, so they’re clearly going to probe Solomon Lew, try to find out what his plans are, and try to get some kind of answer out of him. The additional complexity is that if he’s trying to get a better price for his Country Roads stake, there’s a provision in the Australian takeover laws called Collateral Benefits. This means that you cannot allow a particular shareholder a benefit – even in a separate deal – that suggests they’ve received a higher price for their stake than other shareholders, which would prevent him from extracting a really big premium on his Country Roads shares. It’s most likely that he’s after something like that because that’s where his biggest amount of money currently sits in this overall transaction.
ALEC HOGG: That’s interesting, Arthur. It just seems to come back all the time to personalities. You’d wonder why the guys from Woolworths haven’t, in the last ten years, been able to sit down with Solomon Lew and talk turkey in some way. What would be behind that?
ARTHUR KARRAS: If you look at the nature of people who can make themselves that kind of money…people like that are typically very driven. They are very strong-minded, have a very clear view of how they think things should work, what is to their benefit, and what isn’t. When you run up against that kind of personality, you sometimes encounter a problem like this – someone who just does not want to be moved, has a very clear idea of what he wants, and he has the resources to be able to ‘wait out’ other parties.
ALEC HOGG: Is it a good deal for Woolworths – when all is said and done – at the current price they’re offering for David Jones?
ARTHUR KARRAS: I think it’s a good deal for Woolworths if you look at the bigger, long-term picture. Back in their home market of South Africa, Woolworths has seen a steady stream of foreign entrants into their home turf. Woolworths is therefore saying ‘let’s turn this around. Let’s not just stay at home here and defend ourselves. Let’s get into other markets – a market like Australia that we understand, and where we’ve already been successful – and let’s build our presence there. Let’s become a bigger retailer. Let’s be a threat to other people in their markets, rather than just sitting back here and defending’. I think that it makes a lot of sense in terms of Woolworths’ long-term aspirations. It makes a lot of sense in terms of building a big southern hemisphere fashion brand. I think they’re going to be the largest southern hemisphere fashion retailer once the deal is done, and I think that it speaks to their long-term vision.
ALEC HOGG:Â But if the deal does not go through, would you then expect that the Woolworths share price would come under pressure?
ARTHUR KARRAS: I think if the deal does not go through, in the short term it’s actually not bad for the share price. There is some execution risk in the deal. Quite a few things that need to happen. They need to raise additional capital to make all of this work, and I think that if the deal doesn’t happen it will be a short-term benefit. It means that risk has been eliminated. You don’t have to worry about whether they can get the deal to work in terms of all the operational things they need to do. I think it eliminates a lot of future potential, so short-term = good, long-term = bad, if the deal doesn’t go ahead.
ALEC HOGG: There’s a bit of a paradox here that if Solomon Lew is successful in blocking Woolworths, which seems to be his intention then it will actually benefit the Woolworths share price in the short term. Would it, presumably, hurt the David Jones share price in the short term as well?
ARTHUR KARRAS: It already has. The share price has come back down to its lowest price since the deal was announced, so people are saying ‘there isn’t another bidder for David Jones’. There was another transaction or another proposed transaction a little while back that failed. This appears to be a very promising deal and if it doesn’t go ahead, there are no other immediate options on the table for David Jones, and Woolworths would be precluded from coming back and making another deal in a short period of time so it would not be good for David Jones’ shareholders.
ALEC HOGG:Â Arthur, how do you see this all playing out?
ARTHUR KARRAS: We’re not sure what Solomon Lew wants and that’s our understanding from Woolworths as well. They don’t know what he wants yet. They have postponed the deal because they’re trying to figure out what he wants so that they can clearly reach some kind of agreement about that, and proceed. I think it’s most likely that he’s trying to squeeze a better price out of David Jones or trying to get a better price for his Country Road shares because he’s now found something that Woolworths wants more than his stake in Country Roads, which is the whole of David Jones. He’s looking for some leverage there and I think that over the next few weeks, Woolworths is going to try to find out what that is, and they’re going to try to put the deal to bed.
ALEC HOGG: And you think they’ll be able to achieve it?
ARTHUR KARRAS: I think that Woolworths has an excellent management team. They understand what they’re trying to do. They’re not going to do it at all costs. I don’t think they’re going to be blackmailed into paying a ridiculous price, but I think they’re also far down the road. This is an attractive target for them. They’ve gone to a lot of trouble to convince South African shareholders that this transaction is good for the business –a direction that they need to take – so I think they really want to get this deal done as well. It’s going to be extremely interesting to see how this plays out.
ALEC HOGG: I told you it would be a treat. Arthur Karras is with Old Mutual, one of the most experienced asset managers/money managers in South Africa and certainly, he has a pretty good handle on everything that’s going around at the moment between Woolworths’ biggest acquisition ever – in fact, it’s the biggest retail acquisition by a South African company anywhere in the world – potentially, that is. I think it’s the biggest acquisition by any foreign company into Australia’s retail sector, so lots at stake there. That was Arthur Karras, the Senior Portfolio Manager at Old Mutual Investment Group Macro Solutions.Â
