Woolworths’ R20 billion blunder

Woolworths purchased David Jones in 2014 for R21.4 billion and sold it for R1.1 billion eight years later, making it one of the worst corporate blunders in South Africa.

The David Jones acquisition formed part of Woolworths’ strategy to expand its operations beyond South Africa and increase its international footprint.

Woolworths planned to become a leading apparel retailer in the southern hemisphere, and buying David Jones was a first step toward this goal.

The purchase price of R21.4 billion was at a 25.4% premium to the AUD$3.19 per share it traded at on the day before Woolworths’ announcement.

The investment did not stop there. Between 2015 and 2022, Woolworths invested R7.2 billion in additional capital expenditure (capex) into David Jones.

Combining the initial investment and capex shows that Woolworths invested at least R28.6 billion into David Jones.

When it bought David Jones, Woolworths told investors that it expected David Jones to generate earnings before interest and taxes (EBIT) of at least R1.4 billion within five years.

However, Five years after the acquisition, David Jones generated an EBIT of R371 million – a far cry from their expected R1.4 billion.

In 2018, Woolworths wrote down the value of David Jones by AUD$713 million as Australia’s tough retail market affected the chain.

A year later, Woolworths disappointed shareholders again when it revealed that David Jones had impaired AUD$437.4 million in the year to June.

David Jones only generated total after-tax profits of around R6.3 billion throughout this period when Woolworths owned it.

The debt burden created by the David Jones acquisition and subsequent capex outweighed the profits Woolworths received.

Before the David Jones acquisition, Woolworths had a total interest expense of R136 million.

In 2015, a year after the acquisition, Woolworths had a total interest expense of R1.5 billion, which was R1.4 billion more than the year before.

In fact, Woolworths paid R15 billion in interest expenses during the entire period that it owned David Jones.

This amount is more than twice the profit Woolworths generated through David Jones over the same period.

David Jones blunder

When Woolworths purchased David Jones in 2014 for 21.4 billion, it told investors that it would finance this transaction with existing cash and new debt facilities.

This was not true. Woolworths did not use its existing cash to buy David Jones and turned to debt financing and its investors to finance the deal.

It refinanced R10 billion of its existing short-term debt with new debt. It also took on an R2.5 billion Australian senior debt loan and R9.9 billion through an equity bridge loan.

Woolworths shareholders then financed the equity bridge loan through a rights offer raising the R9.9 billion.

Therefore, the entire David Jones deal was financed with debt and an investor-funded rights offer.

Despite investors financing R9.9 billion of the David Jones transaction, Woolworths’ liabilities still increased by R12.4 billion from 2014 to 2015.

Woolworths’ debt jumped from R15 billion to R28 billion, marking the start of a major debt crisis within the company.

The spending was far from over. From 2015 to 2022, Woolworths spent an additional R7.2 billion on David Jones to revamp and improve its stores.

These expenses pushed Woolworths deeper and deeper into debt. What made matters even worse was that these additional expenses did not deliver results.

The more money Woolworths threw at David Jones, the less money it made. David Jones’s profit before tax peaked at R1.8 billion in 2016.

These profits, however, quickly turned for the worse to the point where it only generated R203 million in 2022.

Woolworths’s debt interest expense that year alone was a whopping R1.9 billion, significantly more than the R136 interest expense it incurred before it bought David Jones.

Woolworths decided to sell David Jones in 2022. It made a deal with Anchorage Capital Partners to sell the entire David Jones for R1.1 billion.

That means that Woolworths sold David Jones for R20.3 billion less than it bought it for and incurred big expenses along the way.

Despite the tremendous wealth destruction, Woolworths tried to put a positive spin on the transaction.

“We unlocked R7.7 billion of value for our shareholders from David Jones since 2022,” Woolworths said.

The value included a combination of R3.3 billion extracted in cash and the sale of the David Jones operating entity for R1.1 billion.

Woolworths added that it retained the flagship Bourke Street property, valued in excess of A$250 million.

“The sale enabled us to remove R21 billion of liabilities, including R18 billion of lease liabilities, from our balance sheet,” Woolworths said.

“This further strengthened the group’s balance sheet and enhanced our financial performance metrics.”