Myer’s fat float

Four months on from its listing and still around 14% off the asking price. Even though it has met expectations so far, Myer has still got its tail between its legs, worse still it may even go for a bigger haircut.

Should investors be dirty? Is it yet another con by smart bankers? Should we leave Jen Hawkins off the Christmas card list?

Popularity and enthusiasm for share floats is generally an intelligent investor’s worst friend. It’s not surprising to hear recent calls have now been made from some of the more sensible quarters of the funds management and investment community to stop using retail investors to effectively ‘bid up’ the price of the ‘book build’ of large scale floats such as these.

Take the cash and skip town – pronto

The job of the sellers TPG/Newbridge/Blum capital was to turn the stores efficiency and profits around, for which I must say they did a sterling job. But really it couldn’t have been much worse for Myer at the time; the stores were tired and management took their eyes off the ball – a prime target for a private equity bath.

Buying the company for $1.4 billion four years ago (this was considered a tad on the expensive side at the time) with mainly debt, they creating efficiencies, reducing warehousing costs and hawking off the Bourke St store before returning to the public markets asking $4.10 per share around three months ago, thus valuing the company at close to $2.4 billion.

Due to the sell-off in assets and payment of dividends, TPG and Blum recouped their original capital so their smart work paid off handsomely.

At the time of purchase back in March 2006, TPG’s Ben Gray commented that as investors they were there for the long haul with a 10 year plan and not looking for a quick flip. I’d be out too if I could stack up an extra $1.58 billion on my original investment. That’s a return on investment of around 112.8% over nearly four years or around 30%+ per year…nice! And all that in a market crash that gave the All Ordinaries a 55% pay decrease.

Since then we have seen it go as low as $3.12 or about a $1.8 billion haircut. Collectively the brokers, analysts, promoters, bankers, etc have cost their clients $1.8 billion, mostly on paper at least.

I’m not the one heading off to The Maldives

While great for them and a great example of private equity in action, I’m not here to sell the Myer business. I advocate for the buyer, or you and I, Mr and Mrs Ordinary Investor.

I/we were being asked to replace the vendors of the float as owners, and sorry to say but history is stacked with overhyped floats asking new shareholders to replace the old owners and pay a substantive premium for the privilege. (Hence why a popular float is an intelligent investor/adviser’s WORST friend) – your investment history will be judged by what you don’t buy rather than what you do.

Remember that Ben Graham (Warren Buffett’s mentor) taught us that in the short-term the sharemarket is more like a popularity contest, more like a punching bag and in the long-term a weighing machine. Short-term movements up and down in share price will mean nothing because most participants don’t understand whether they paid too much or got a bargain and good value for their ‘investment’.

What you should be aiming to be doing as an investor is to simply pay as little as you can for investment assets with intrinsic value for less than they are worth as a shareholder; you are a part owner of that business after all. That my SmartCompany friends applies to your everyday dealings as well.

Some very simple and quick analysis with a sum of the parts will avoid you seeing the PE and bankers taking off with your hard earned in the next overhyped float.

As it applies to the figures above their extra 1.58 billion of supposed value they created for themselves after stripping out asset sales and adjusted a few things like the cash they took out of the business for themselves, etc when compared to company earnings, the asking price was far too rich for my limited hoards of cash.

Remember if (in the short-term) Myer stock becomes a punching bag, which may well happen, and hits a more reasonable price, an intelligent buyer would be wise to pick it up (at the expense of others who consider just its price).

Short-term it’s still not cheap, long-term, well you really want that all important margin of safety wouldn’t you?

Profit from other peoples’ folly, please don’t participate in it!

Nick Christian is a Financial Adviser and planner and authorised representative of Millennium3 Financial Services.

The views and opinions expressed within this letter are those of the author and do not necessarily reflect those of Millennium3 Financial Services Pty Ltd.

The above is general in nature and should not be acted upon without seeking the advice of a professional licensed financial planner.