Woolworths’ ear-piercing journey with David Jones, the Australian retailer it acquired eight years ago, has finally come to an end with its recent sale.
The acquisition, initiated as part of Woolworths’ strategy to expand internationally beyond South Africa, aimed to establish the company as a leading apparel retailer in the southern hemisphere.
In 2014, Woolworths announced the purchase of David Jones for R21.4 billion, signifying a significant premium of 25.4% over its previous share price.
Over the next six years, Woolworths invested billions into David Jones to enhance its stores and operations. Additional capital expenditure (capex) amounted to R7.2 billion between 2015 and 2022, totalling an investment of at least R28.6 billion.
Despite these efforts, the acquisition did not yield the anticipated results. Woolworths had expected David Jones to achieve earnings before interest and taxes (EBIT) of R1.4 billion within five years, but the reality fell short. Five years post-acquisition, David Jones generated only R371 million in EBIT.
Market challenges in Australia’s retail sector led to significant write-downs. In 2018, Woolworths wrote down the value of David Jones by AUD$713 million, followed by another impairment of AUD$437.4 million in 2019.
Throughout Woolworths’ ownership, David Jones generated after-tax profits of approximately R6.3 billion, overshadowed by the massive debt incurred from the acquisition.
The debt burden translated into substantial interest expenses for Woolworths. In 2015, a year post-acquisition, Woolworths’ interest expenses soared to R1.5 billion, marking a dramatic increase from R136 million in 2014.
Ultimately, the mounting impairments, growing debt, and lacklustre profitability prompted Woolworths to divest from David Jones. In December 2022, Woolworths announced the sale of its entire stake to Australian private equity fund Anchorage Capital Partners.
While the sale relieved Woolworths of R17 billion in liabilities, the financial toll was significant. Although the exact sale price was undisclosed, reports suggest it was around AUD$130 million (R1.6 billion), representing a staggering loss of R19.8 billion compared to the acquisition cost.
Considering the additional R7.2 billion investment, the David Jones venture stands as one of the most significant corporate missteps in South Africa. Woolworths, undoubtedly, will proceed with caution to avoid such pitfalls in the future.
