SYDNEY — An Australian private equity firm has bought the country’s oldest department store chain, making an ill-timed bet on brick-and-mortar retail as the central bank tries to rein in consumer spending.
Anchorage Capital Partners agreed to pay Woolworths Holdings Ltd. of South Africa. A$130 million ($86.9 million) for 184-year-old David Jones Ltd. The business, according to people familiar with the deal.
Woolworths will collect dividends until completion and retain freehold ownership of the flagship Melbourne store, which will be leased back to new owners for an initial 20-year period, people familiar with the matter said. They added the deal was worth about A$500 million to Woolworths.
Woolworths announced the sale to the Johannesburg Stock Exchange on Monday for an undisclosed price, saying it would remove about 17 billion South African rand ($964.1 million) of liabilities from its balance sheet. Woolworths is expected to complete the sale in early 2023.
“Despite commendable progress in the turnaround of David Jones over the past two years, which has resulted in a significant improvement in the underlying operational and financial health of the business, WHL has concluded that the David Jones business is no longer aligned with the strategy of the group objectives,” Woolworths said in a market filing.
It would end a tumultuous chapter for David Jones, one of two high-profile survivors of a once-crowded department store industry that, like America, has been beset by mergers, takeovers and closures in recent decades. influences.
Woolworths paid more than A$2 billion to take the upscale chain private in 2014, but has since recorded multimillion-dollar write-downs as shoppers moved online and to specialty and discount retailers.
Anchorage, which specializes in corporate turnarounds, believes it can rebuild value by leveraging its omnichannel retail experience and supply chain expertise. Anchorage partner Beau Dixon told The Wall Street Journal on Monday that the business was cash flow positive after cost cutting and the sale of assets, including prime sites in Sydney’s central business district.
“It’s a very profitable cash-generating business for us. It’s about driving incremental efficiencies,” said Mr. Most of the chain’s 43 stores in Australia and New Zealand were profitable, Dixon added.
He added that there are currently no plans to cut any of its 6,750 jobs.
Anchorage has identified supply chain savings of AUD 10 million through improved efficiency and reduced transport costs.
However, the takeover comes as central banks in Australia and New Zealand are raising interest rates in an attempt to rein in consumer spending that helps fuel rampant inflation. The Reserve Bank of Australia expects economic growth to slow from 3.0% in 2022 to 1.5% in 2023, while the Reserve Bank of New Zealand expects a mild recession in 2023.
Both banks expect the rate hikes to start to have an impact next year as many of the fixed-rate mortgage terms set at a time when the cash rate was historically low will begin to have an impact. Thousands of borrowers will face higher monthly repayments, forcing them to cut spending in other areas, such as clothing, the cornerstone of David Jones’ business.
Morgan Stanley analyst Melinda K. Baxter (Melinda K. Baxter) said this month that the Covid-19 pandemic has driven discretionary retail demand, and advised clients to avoid stocks affected by housing market sentiment and the big market. pen purchase impact.
“We see downside risks to sales expectations for the discretionary category in fiscal 2023 as consumers look for ways to spend less,” she said. Baxter wrote in his notes.
Anchorage argues that Woolworths is an unsuitable owner and that there is still value in the business, which boasts glitzy jewelery displays and an underground Sydney food court and champagne bar.
“The basis for their entry is that they can replicate the success they’ve had in their home market with Woolworths’ large range of own-label products. The Australian market is very different to the South African market and for them it doesn’t align with strategy” Mr. Dixon said.
“We come in as a focused owner and that’s our number one priority,” he added.
David Jones’ annual revenue fell 2.6 per cent in the 12 months to June, which Woolworths blamed on the Covid lockdown during the first-half financial period. On a more positive note, it reduced trading space by 2.6 per cent and reported an operating profit of $83.7 million.
Boosting online sales will be a major focus. Figures from the Australian Bureau of Statistics show Australians’ online spending rose nearly fivefold from April 2016 to a peak in September 2021, when the country was in the midst of the COVID-19 lockdown. It has since slowed, but still accounts for about 10% of all retail spending in October 2022.
Mr Anchorage approached South African supermarket retailer Woolworths in early 2022, submitting an indicative offer in September. Dixon said. He said the two sides had held exclusive talks in November and the deal was completed in the early hours of Monday. Anchorage’s investors include major Australian superannuation funds, as well as funds in Asia and North America.
Anchorage will retain David Jones’ current management, including chief executive Scott Fyfe, with a strategic focus on optimizing customer data and prioritizing premium brands. Anchorage will not withdraw dividends and plans to reinvest profits, sir. Dixon said.
Rival department store survivor Myer Holdings Ltd. made an unsuccessful merger proposal to David Jones in 2013, suggesting improvements are possible. It reported an annual profit of A$49 million for the 2022 financial year, compared with a loss of A$486 million four years later.
Write to Stuart Condie at stuart.condie@wsj.com