takeover target?

Interesting read from the Australian today
David Jones, Harvey Norman the next targets for private equity: Deutsche Bank ..

ELECTRONICS and furniture retailer Harvey Norman and upmarket department store David Jones have been singled out by Deutsche Bank as the next likely takeover targets after US private equity firm KKR's move on retail wholesaler Pacific Brands.

Given extended share price weakness in the discretionary retail sector, Deutsche said Harvey Norman, David Jones and possibly Myer were "the most likely to attract private equity interest".

Harvey Norman's considerable property portfolio could "unlock substantial value for a private equity buyer", Deutsche's retail analysts Michael Simotas and Paul van Meurs said in a client note.

Harvey Norman share price has come under significant pressure because of industry concerns about the company's ability to compete in a changing retail environment. Consumer electronics are under pressure because of deflation and aggressive price competition, but a leveraged buyout of Harvey Norman would not be easy, given that founders Gerry Harvey and Ian Norman and related parties control 50 per cent of the shares and "would need to be convinced about the merits of a potential transaction".

David Jones is also an attractive target because of its ownership of CBD stores in Sydney and Melbourne. The properties could be sold and leased back, boosting returns for potential private equity buyers, Deutsche said.

The retailer's reputation has suffered from recent profit warnings and inventory issues, and a potential suitor would need "visibility of earnings" from the business beyond 2014.

A bid for Myer and an exit strategy could prove more difficult for private equity suitors because the company "has only been in the public market for a short period of time and has underperformed since its initial public offering", Deutsche said. Myer listed on the stock exchange in 2009.

JB Hi-Fi was also less likely to attract interest, given the less appealing returns on offer.

Billabong's high debt levels and deferred payments could mean a transaction was unlikely to stack up for a potential buyer, Deutsche said. "However, given its strong brands, there is always the possibility of an approach by a trade player," the analysts said