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What’s Solomon Lew’s game with Myer?

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By Andrew Main

You can accuse Solomon Lew of all sorts of things but you can’t say he’s boring.
 
His latest foray sees him doing his best to put a rocket up the management of the Myer group in advance of the annual meeting on November 24.
 
A month ago he formally sought a copy of the share register, which he is quite entitled to do, although Solly watchers note that he already knows exactly who the biggest holders are.
 
There’s his Premier Investments with the 10.8% stake for which it paid a comparatively high $101 million back in March, and Anton Tagliaferro’s Investors Mutual with a slightly smaller total, still exceeding 10%.
 
Anton said recently that his organisation had been buying in “over the last few months” which sounds like careful backfoot buying.
 
By comparison everyone knows Solly bought his stake in a one day raid in March at $1.15 a share, and on which he has so far copped a paper loss of almost $40 million.
 
So, does Solly know something the rest of us don’t about the terrific potential for perennial underperformer Myer, or is he yelling because he’s in a jam?
 
His record suggests he’s a risk taker who loves to scare the establishment but his win-loss record is not exclusively stellar.
 
Going back into the records, he took a whacking over a play he made in the late 1980s whereby a vehicle called Yannon bought $25 million worth of shares in Premier, using finance and an indemnity provided by Coles Myer Ltd. Coles Myer never disclosed the transaction despite it having lost $18 million on it. The effect of the Yannon deal was to prop up Premier at a time when it was heavily in debt from a foray into the Westfield group
 
The ASC, as the Australian Securities and Investments Commission (ASIC) was known then, investigated the case and recommended a prosecution but the Commonwealth Director of Public Prosecutions never laid charges, shutting down the investigation in early 2000. So Solly walked away an innocent man, although he had to contribute to a $12 million settlement with Coles Myer.
 
The washup of that affair meant he stepped down as chairman of Coles Myer and was subsequently compelled by chairman Stan Wallis to step down from the board entirely in 2002.
 
That doesn’t sound a lot like a win, most particularly in reputational terms.
 
Financially, he has done well from a number of leverage plays since then.
 
Between 2004 and 2007 he did very well out of holding a stake in Coles Ltd (as it became in 2006 after Myer was bought by private equity group TPG).
 
He can claim a bit more glory on that one, as it was he who encouraged the KKR private equity group to bid for Coles.
 
KKR didn’t get Coles in the end but in April 2007 Solly’s Premier Investments sold its 5.9% stake in Coles Ltd to Wesfarmers for $16.47 a share, collecting a gross profit of $1.14 billion.
 
That can’t be described as anything but a very good outcome for him.
 
His other subsequent coup was a very effective piece of greenmailing in relation to a parcel of shares in Country Road in 2014.
 
Greenmail is an entirely legal practice whereby a shareholder who owns more than 10% in a stock can hold out for the best price. Any less than 10% and the bidder is allowed to move to what’s called compulsory acquisition.
 
It was a complicated deal whereby South African group Woolworths had to pay Premier $210 million to buy its 11.8% stake in Country Road as part of a takeover bid Woolworths for David Jones, in which he also had a stake.
 
In other words, he held all the cards and that netted him well over $200 million, entirely legally.
 
So that’s some recent background. You can rightly conclude that Solly Lew is extremely smart and he loves nothing more than holding a blocking stake in a company that someone else wants to take over.
 
Which brings us back to Myer now. Solly’s complaining to anyone who will listen that Myer is badly run and that some of its stores are more like an opportunity shop than a top end retailer.
 
He recently asked in vain for two board seats after forcing chairman Paul McClintock to announce in September that rather than step down in favour of former Spotless chairman Garry Hounsell, as he had planned, he would put himself up for re-election at the November 24 annual meeting.
 
So this Solly bull is making significant inroads in the Myer china shop.
 
But, and this is a big but, where’s a bid for Myer going to come from that will justify his massive $101 million outlay on getting his blocking stake in the stock?
 
He’s muttering about calling an extraordinary meeting to roll some or all of the board, and his rumblings are made all the more valid by the fact that he has huge experience in retail and the board doesn’t.
 
But he’s already said he has no intention to bid and there’s no one else within cooee who wants to take over Australia’s number two department store group at a time when the entire retailing world has been thrown into uncertainty by the imminent arrival of Amazon.
 
Bear in mind that much of the sorrow at Myer was caused by the fact that the pre-float owners TPG cut costs out of the business then sold it for the highest price they could, which was a startling $4.10 a share, in 2009. It’s now worth around 77 cents.
 
Meaning, he might have to work this one the hard way: arm wrestle his way to a position of power on the board and then oh so slowly turn the ship of Myer round to the sort of profitability it enjoyed back in the mists of retailing time.
 
It’s a very big job and it would be a mistake to see Solly Lew as having a nice full hand of royalty cards ready to play on this one.
 
At this point, he’s popping on and off stage like a pantomime villain but he’s not doing it because he’s got a clever trick up his sleeve. He’s doing it because he doesn’t have a lot of alternatives.
 
I wrote back on September 20 when Myer shares were at 70 cents that I couldn’t see how any brokers could put a “buy” on them. Solly’s current campaign has pushed the price up to around 77 cents.
 
But unless you think he is a retail genius who will be allowed to rescue Myer’s fortunes, or you think there’s a bid coming for Myer from somewhere, it’s still a challenging proposition. I’d still avoid it.

Published: Wednesday, November 01, 2017


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