Myer acquisition of Premier apparel brands makes sense to Citi

Myer’s proposed acquisition of Premier Investments’ apparel brands would provide a boost for shareholders of both companies, according to Citi.

Premier Investments chairman Solomon Lew and CEO Richard Murray, at the Melbourne Central Smiggle store in the CBD. Picture: Ian Currie

Myer’s proposed acquisition of Premier Investments’ apparel brands would be a winner for shareholders of both companies, according to Citi.

The US investment bank says the combined group would benefit from Premier’s product expertise as well as better buying terms stemming from an increase in scale.

Citi analyst James Wang sees potential for a 5 percentage point uplift in Myer’s private label apparel gross profit margin, generating a $25m increase in earnings for Myer.

The total potential synergies could be at least $50m, he says.

In a strategic update last month, Myer saw opportunities to create “material value” for its shareholders including via renewed focus on enhancing and expanding private label and exclusive brands portfolio.

The department store operator is exploring a potential combination with Premier Investments’ Apparel Brands business to “accelerate strategic priorities”.

Premier has said there may be “meaningful opportunity” for both businesses from the proposal. Premier Investments owned 31.37 per cent of Myer shares as of April 18th.

With Myer’s private label apparel generating about $500m or 15 per cent of Myer’s sales in financial year 2023, Citi estimates the proposed combination would generate a $5m increase in earnings for every 1 percentage point of private label margin expansion.

“We think better supplier terms owing to greater scale of the combined group could see at least 5 percentage points of private label margin expansion or about $25m of earnings upside,” Mr Wang said. “The opportunity could be more material than this, however.”

He estimates Premier’s apparel gross profit margins are about 58 per cent versus only about 40-50 per cent for Myer. “The margin gap represents the potential upside,” he said.

As well as the $25m earnings uplift from private label margin expansion in apparel, Mr Wang sees $10m of synergies from the placement of Premier Investments’ products as “concessions” within Myer stores, and at least $7m of synergies from distribution centre consolidation in West Melbourne, head office and other cost reductions.

“Total synergies could be at least $50m if the transaction was to go ahead,” Mr Wang says.

“Premier represents a unique opportunity for shareholders to participate in growth opportunities from the international rollout of Peter Alexander, as well as potential earnings upside from various synergies through its holdings in Myer.”

The proposed tie-up of apparel brands would allow Premier shareholders to participate in upside from both international expansion of Peter Alexander and Smiggle, as well as domestic synergies.

It would also make Century Plaza, which is the private investment vehicle of Solomon Lew, the largest shareholder of Myer as well as Premier, with Century Plaza expected to be represented on the Board of Myer, the company said in its announcement last month.

Mr Lew has indicated he would also be prepared to take an active role as a non-executive director of Myer if the transaction proceeds.

“We think these aligned interests could allow the Myer team to focus on unlocking domestic synergies and growth opportunities, and for Premier to focus on driving international expansion in Peter Alexander and Smiggle,” Citi’s Mr Wang said.

A deal would be subject to agreement on transaction terms and would require approval by the Board and independent shareholders of Myer, as well as the Board and shareholders of Premier.

It would also be subject to the report of an independent expert as well as ASX, ACCC, ASIC and Australian Taxation Office engagement to the extent required.

An independent board committee, led by Myer executive chair Olivia Wirth, including all of Myer’s independent non-executive directors except Premier’s nominee director, has been formed to consider the proposed combination with Apparel Brands.

Myer shares fell 1 per cent on Monday to 76.5c, while Premier rose 0.2 per cent to $29.71.

Originally published as Myer acquisition of Premier apparel brands makes sense to Citi