Myer roadshow promising; decision time looms for TPG

MYER'S share sale roadshow is pausing this week and while Myer chief executive Bernie Brookes is grabbing some rest, recreation and birthday cake in Las Vegas, results so far suggest that private equity group TPG faces an intriguing call about how many shares to sell.

Brookes flew out last week after completing the local leg of the roadshow, and is taking a few days in Vegas to celebrate his 50th birthday and gather strength for the overseas leg Los Angeles, San Francisco, New York, Boston, London, Singapore, Hong Kong and then be back in Australia in time for the institutional book-build on October 28.

TPG led the Myer buy-out in 2006 and owns 84.2 per cent of the retail group. It, and the Myer family, which owns 8.3 per cent, will sell at least 80 per cent of their holdings, and measure demand in the book-build before deciding whether to sell more, or all of their shares.

Myer insiders say there has been healthy institutional interest, but there are also reports the institutions are lukewarm. But claim and counter-claim about the level of demand are the norm ahead of institutional book-builds for floats. The key question is whether the $3.90 to $4.90 indicative price range and 14.3 times to 17.3 times prospective price-earnings ratio is too confident on profit growth.

TPG believes Brookes will deliver, and so, obviously does Brookes. He has re-signed with Myer until 2012, and has new long-term share incentives that won't begin to vest until he achieves compound annual profit growth of 10 per cent a year, and will not fully vest until he hits a 15 per cent return. By way of reference, David Jones is forecasting profit growth of between 0 and 5 per cent this financial year.

TPG can send the market a message that it has confidence in Brookes' plan by declaring that it is retaining a substantial stake in the refloated Myer. I think it should. But TPG's founder, David Bonderman and the private equity group's top Australian representative, Ben Gray have to weigh several things.

Myer will probably be the most profitable private equity float in the world this year, and, like the Reserve Bank's interest rate rise last week, has the potential to make news beyond these shores, and lay a path for other private equity sales.

TPG, the Myer family and Brookes and other Myer executives who own 7.5 per cent and will retain 92 per cent of their stake have already covered their original investment plus 25 per cent after receiving a capital return following the sale of the freehold on Myer's Melbourne flagship store in 2007.

The float could add about $2 billion to the kitty, and it is not just TPG and the Myer family who will welcome the dividend.

TPG's pension fund backers also want a big cash payout, because the market meltdown has reduced the value of listed shares in their portfolios, raising the weighting of alternative assets including private equity by default. The imbalance is less severe than it was when the sharemarket bottomed in March, but share prices are still well below their peaks. Cash proceeds from the Myer sale will be spread to the funds that back TPG, and either held or redeployed by them into shares, bringing their private equity weighting down.

Another issue for Bonderman and Gray is that retail demand so far appears strong. Firm orders for shares from brokers are believed to have locked up at least a third of the available shares, and Myer is also offering shares to retail investors generally, and marketing the share sale through its MyerOne loyalty program.

A total of 20,000 gold card members who spend between $7500 and $13,000 a year are guaranteed an allocation of $25,000 worth of shares, and 100,000 silver card members who spend between $2500 and $7500 a year are guaranteed $5000 allocations, up to a total cap of $200 million.

TPG and its co-owners envisaged that the float would deliver a share register that split evenly between retail investors and institutions. The retail share sale conduits look likely to create demand for more than 50 per cent of the shares on offer, however, and even if retail applications are scaled back to keep the retail base at 50 per cent, institutional allocations could be squeezed if TPG and Myer retain up to 20 per cent of their holdings.

It all depends on how much institutional demand there finally is, of course. But TPG knows that a sale that sends Myer on to the ASX at or near the $4.90 top of its indicative price range will put pressure on the shares, and on Myer's management team.

There is more prospect for price appreciation if the shares list around $4.40, the middle of the price range. If demand is strong TPG (and Myer, for that matter) can chase that scenario by tipping more of their shares into the auction.

Both would cop criticism, but TPG seems prepared at this stage to wear it if it takes a larger share sale to create a lower and less demanding price base for Myer's second life as a listed company.

THE conventional wisdom is that shares beat cash, but the global crisis was an unconventional event, and it has taken the big share rally since March to resurrect the axiom.

There's no problem with the long run. Off an index base of 100 in May 1992, the ASX 300 index has risen to 561.1 on a total return basis, and UBS' bank bill index has risen to only 267.5. But at the sharemarket's nadir in March, cash and the ASX 300 were in a dead-heat since June 2003. The rally since then has taken the ASX 300 to the point where it is now about as far ahead of cash since 1992 as it was in October 2005.