Myer fight shows investors need to act

_{This article originally appeared in the NZ Herald.}

The battle for control of Myer, the large Australian department store operator, is generating huge media interest across the Tasman.

It demonstrates that Australian investors don’t stand idly by when their companies underperform.

We can learn a few lessons from active investors in other countries, particularly in Australia.

Myer Holdings listed on the ASX in 2009 after issuing shares to the public at A$4.10 each. This valued the company at A$2.4 billion ($2.7b).

The IPO proceeds were used to repay debt, pay for the cost of the public offer and purchase shares from existing shareholders, mainly private equity.

The directors said that Myer would expand from 65 to 80 stores and had the “potential to expand to over 100 stores”.

Myer now has only 63 stores; its share price has plunged to A78c and the company has a sharemarket value of just A$0.6b, compared to the A$2.4b IPO issue price.

The retailer had 48,900 shareholders at the end of September compared with 59,300 shareholders following the IPO.

Myer shareholders have taken a hammering as the value of their investment has plunged 76 per cent since the company listed while the ASX benchmark capital index has appreciated 31 per cent over the same period. The Myer figure accounts for a 2 for 5 rights issue, at A94c a share, in September 2015.

A combative annual meeting was held in Melbourne on November 24 with outgoing chairman Paul McClintock opening with these comments: “Today is your opportunity to send a strong message that you want the board and management to get on with the job of delivering New Myer.

“Today is your opportunity to send a message that you want a cohesive and united board”.

These pleas were in response to significant shareholder discontent and the company’s extremely poor profit performance.

Myer reported a net profit after tax of only A$11.9 million for the July 2017 year compared with a 2009 prospectus forecast of A$160m for the July 2010 year.

The company paid a A5c dividend for the 2016/17 year compared with a 2009 prospectus forecast in the A20.5c-to-A21.2c range for the July 2010 year.

A major criticism of retailers, including Myer, is their use of supplier rebates to boost earning. These supplier rebates allow retailers to take profits on the purchase of inventory before products are sold.

For example, if a retailer purchases $1000 worth of goods, the payment of $1000 is followed by a cash rebate of $200 from the supplier to the retailer. This $200 can be taken as profit by the retailer, even before the goods are sold.

Supplier discounts were highlighted by Tesco’s problems in the UK. The collapse of Dick Smith in Australia also drew attention to the issue of supplier rebates.

Dick Smith’s liquidator’s report indicated that the failed company was heavily reliant on these discounts and eventually “heavy discounts were needed to sell the rebated stock, destroying the margin uplift that the rebate sought to achieve. And in some cases the stock could not be sold at all and became obsolete.”

The Australian Financial Review reported that: “Bill Wavish, a former chairman of Myer and former director of Dick Smith, told the liquidator’s hearing that retailers cannot survive without rebates and, for most retailers, rebates exceed profit. ‘You avoid maximising rebates at your peril,’ he told the Supreme Court of NSW.”

Supplier rebates are also common in New Zealand. This creates issues for investors and analysts because of the poor disclosure and transparency relating to these discounts.

Last week’s Myer annual meeting was a showdown between Solomon Lew, who owns 10.8 per cent of Myer through ASX-listed Premier Investments, Lew’s 5000 retail shareholder supporters and the Myer board.