Cunning as a Fox
Townsville BREAK out the DeLorean: we seem to be living in a Back to the Future world and back, most particularly, to those rollicking pre- crash days of Michael J Fox’s Marty McFly around 1985.
In the past week, we’ve been awash with stories – and people – reliving the crash of 1987, while Paul Keating and Jeff Kennett have both suddenly erupted on the front pages once again.
Making it at least a 1980s threesome has been Solomon Lew erupting on to, and then from, the share register of Myer just as he first did more than 30 years ago.
In truth though, it’s more a case of the more things seem to be the same the more they are actually different.
You can make your own judgments about Kennett and Keating, but so far as Lew and Myer are concerned – yes, there are elements in 2017 that are very similar to the early 1980s but we now have a very different Lew and a very different Myer in a very different world.
Lew is now a billionaire, and a $ 100 million investment in Myer – suddenly worth only $ 65 million – is not his main game. And Myer in turn is not the only, lusciously beckoning, game in town.
In sharp contrast, back in the 1980s Lew was betting his then much smaller bank on a Myer that really was the main game in non- food retail and THERE’S an extraordinary, sobering and extremely instructive number in the latest Future Fund Report: $ 8 billion.
That’s the amount the FF has in Australian equities. Just 6 per cent of a total p portfolio of $ 134 billion. Further, FF invests in nine asset classes.
The investment in Australian equities was the smallest of the nine, smaller even th than the $ 10 billion it had in emerging market equities and less than a third of the $ 25 billion it had sitting in cash.
First, an important broad point. Every night we should thank the former tr treasurer ( and now FF chairman) Peter Costello for forcing his Budget surpluses into th the FF. By the by, think of those Costello surpluses fondly – you’ll never see another one. Then, we should thank even more the FF investment managers’ sustained outperformance – turning Costello’s $ 60 billion into $ 134 billion in barely a decade. R Remember, it’s your money. So, why extraordinary, sobering and instructive? It’s a further dramatic sign of how the world has changed from that of the 1980s when any investor back then would have had 70 per cent or so in equities and almost all of it in Australia. The FF is telling us that there ain’t much to invest in down u under. That both explains and causes the dramatic underperformance of the Aussie m market – still ( and uniquely) 10 per cent below its pre- GFC peak.
But for ( three of) the big banks, we’d be more like 20 per cent below the pre- GFC peak. Then think about that “big bank success” – it’s all about playing a 20th century property game. That’s Australia 2017. with a “future” to boot. Indeed, it became the vehicle for Lew to leverage himself into the dominant position in what was the main game in all Down Under retail, food and non- food both: the merged Coles Myer group.
The rest would then be a lot of history spread over more than two decades, climaxing in the $ 20 billion Wesfarmers acquisition just before the global financial crisis, which saw Lew exiting the Coles ( by then sans Myer) register a billionaire.
While he exited the Coles register, Lew did not exit retail. And that’s what’s brought him back to this Myer future.
And brought him back on two levels: as a supplier of products, indeed its single biggest supplier, and as an intended controller of its future.
As I wrote a week ago, there are three keys to understanding Lew, then and, even more pungently, now. He doesn’t like losing money. He’s losing more than 30c of every dollar he’s put into Myer shares.
He’s persistent. He spent nearly 20 years “sitting outside the boardroom door” at Country Road to ensure he didn’t lose money. He didn’t.
And he knows retail like no one else in Australia still with their hands on a register, except perhaps only Gerry Harvey.
All three come together pungently and provocatively in Myer.
This is very definitely not to say two things.
One: that he, far less he alone, has the magic elixir to revive bricks- andmortar department store retailing in the Age of Amazon, and especially the coming of the Age of Amazon Down Under.
Two: that the board should just bend over. He is only an 11 per cent shareholder. The board has to focus on the best interests of 100 per cent.
But those “best interests” do not mean running the business badly in a tactical operational sense or failing to address long- term structural threats.
It is precisely because Myer is a “challenged” business in a very different world that straight- out rejection of Lew is not a viable option.
The key objection of letting him into the boardroom is his conflict as supplier.
It is also precisely his major interest in Myer and why he would see it not as a conflict but a unified interest. The more Myer grows its sales, the more it will grow his sales to Myer.
The board has two choices: a fight to the death it cannot win, or finding a way to turn the conflict into a managed union.