SYDNEY -- Long-term David Jones (ASX: DJS.AX) shareholders had some rare good news Friday morning, with news that the company's board had been approached by an as-yet unnamed U.K. entity with an unsolicited offer for the business.
The one-paragraph announcement was unsurprisingly brief, with no information released on any valuation from the would-be acquirer and the company's board advising that the information received was insufficient to allow a formal consideration of the offer.
David Jones would be an attractive target for a cashed-up acquirer, who believed the company still had a reasonable chance to flourish despite the online and overseas competition, and comes hot on the heels of speculation of a private-equity play for Billabong (NASDAQOTH: BBG.AX) and recent moves on Echo Entertainment (ASX: EGP). Buyers are certainly coming out of the woodwork.
A nice kicker
David Jones has significant property assets, which an acquirer would likely sell for a quick cash return -- as was the case with the Myer (MYR.AX) purchase and refloatation in recent years.
The property is on the books at more than $400 million -- but some analysts are speculating it could be worth $1 billion.
With every likelihood that retail will recover in the coming years once consumers start to spend again, a purchaser would be planning to then sell or refloat the business.
After taking an initial cash return from the property portfolio, it's likely that a buyer would then seek to relist David Jones onto the ASX, taking advantage of any upswing in consumer and investor confidence to sell a company with higher profits into a market paying a higher multiple of earnings.
Anatomy of a private-equity play
In (hypothetical) numbers, here's how it might play out.
David Jones was Friday morning selling for $2.55 -- 12 times next year's consensus forecast earnings of $0.21 per share.
The company had $460 million of land and property on its balance sheet. The acquirer might plan to sell all of the land and take a few hundred million of almost-immediate gain.
Knowing that investors value companies on multiples of earnings, the acquirer would gamble that the property sale won't hurt David Jones' attractiveness to investors.
The acquirer holds the company for a few years, making some improvements and waiting for the retail recovery to take hold. The result of both factors might lead to a return to historic earnings per share of $0.30 to $0.33, plus a little more for the improvements made -- let's call it $0.35.
Lastly, instead of a pessimistic market paying 12 times earnings today, the acquirer gets to sell DJs at 16 times earnings to an optimistic market in a few years.
Foolish takeaway
Adding all of that up, the acquirer sells $0.35 of earnings at 16 times -- meaning a sale price of $5.60, and it gets to keep the few hundred million in property sales on top of that.
If it bought the company at today's price, it would turn a $1.3 billion purchase into a $2.9 billion sale, plus property proceeds of, say, $400 million to $900 million. Not a bad way to make $2 billion or $2.5 billion!
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