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South Africa's Woolworths set to buy David Jones for $2 billion

South African retailer Woolworths Holdings is set to buy Australia's second-largest department store David Jones for $2 billion, trumping an offer from Australian rival Myer Holdings with a hefty premium.

The deal, the biggest for Woolworths to date, creates a leading southern hemisphere retailer that will benefit from greater scale and a common fashion seasonality, and comes as Australia's retail market proves increasingly attractive to overseas players.

Resilient consumer spending, fueled by a strong local currency and record low interest rates have encouraged the likes of Sweden's Hennes & Mauritz, and Japan's Fast Retailing, the operator of the Uniqlo clothing chain to set up shop in Australia although acquisitions are less common.

Pedestrians walk past a David Jones Ltd. department store in the central business district of Melbourne, Australia.
Carla Gottgens | Bloomberg | Getty Images
Pedestrians walk past a David Jones Ltd. department store in the central business district of Melbourne, Australia.

Woolworths, an upmarket retailer, offered A$4.00 per share. That represents a 25 percent premium to its closing price on Tuesday and a 40 percent premium to its close on Jan. 30 when the Myer offer was made public.

"This makes a huge amount of strategic sense, they can afford to pay a high multiple," said Commonwealth Bank retail analyst Andrew Mclennan.

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"There is going to be big synergies coming from this transaction."

Myer said in a statement that it would withdraw its so-called "merger of equals" all-stock bid that had not offered a premium and valued David Jones at A$1.7 billion based on Tuesday's closing price. Myer shares were 9 percent higher in early trading.

Shares in David Jones jumped to match the bid price but later pared gains slightly to trade 23 percent higher at A$3.93.

Attractive Australia

Retail sales rose 0.2 percent in February to a record A$22.97 billion, following a 1.2 percent climb in January. It was the 10th straight month of increases, the longest such stretch since 2006/07.

The retail sector accounts for 17 percent of Australia's A$1.5 trillion in annual gross domestic product (GDP) and is the second-biggest employer, providing 10 percent of all jobs.

The deal also came on the same day that a measure of Australian consumer sentiment rose for the first time in five months in April as households became more optimistic on the near-term outlook for both the economy and their own finances.

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Woolworths Holdings, which has no relationship with Australian supermarket chain Woolworths, is modeled on U.K. upmarket retail giant Marks & Spencer, which has also been preparing a move into Australia's robust retail sector, according to local media.

It also owns upmarket Australian clothing retailer Country Road as well as another clothing chain Witchery.

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