Pedestrians walk past a David Jones department store in central Melbourne in this September 24, 2009 file photo. South African retailer Woolworths Holdings Ltd is set to buy Australia's second-largest department store David Jones for $2 billion, trum
Pedestrians walk past a David Jones department store in central Melbourne in this September 24, 2009 file photo. South African retailer Woolworths Holdings Ltd is set to buy Australia's second-largest department store David Jones for $2 billion, trumping an offer from Australian rival Myer Holdings Ltd with a hefty premium. Reuters/Mick Tsikas/Files

Australian retailer David Jones Ltd has agreed to be bought by South Africa's Woolworths Holdings Ltd. for A$2.15 billion ($2 billion), ditching a way higher offer lodged earlier by rival Myer Holdings Ltd at A$3.4-billion ($3.09-billion).

The good news was immediately felt in a ripple effect in the shares of David Jones which jumped to 72.5c to $3.915c by 3 pm (AEST). It even hit a high $4 earlier.

The Woolworths deal was "a compelling proposal which represents a significant premium to not only our intrinsic value but also to broker valuations and to recent share prices," Gordon Cairns, DJs chairman, said.

Unrelated to the Australian supermarket giant of the same name, South African retailer Woolworths' proposal was a $4 per share takeover offer. It signified a 25 per cent premium to David Jones's Tuesday closing price and a 40 per cent premium to the Jan 30 closing when Myer disclosed its offer.

"There is going to be big synergies coming from this transaction," Andrew Mclennan, Commonwealth Bank retail analyst, said.

"This makes a huge amount of strategic sense, they can afford to pay a high multiple."

Ian Moir, Woolworths chief executive officer, told reporters in Sydney on Wednesday they're buying David Jones to build a bigger southern hemisphere brand. "We've got real scale in the southern hemisphere, we've got the same seasonality, so we've got a real competitive advantage over northern hemisphere entrants."

He said Woolworths could add $130 million per annum to David Jones bottom line in the next five years.

Department store retailer Myer has withdrawn its merger proposal.

"While we believe in the strategic merits of our proposal and the potential value accretion for both sets of shareholders, we have always maintained a disciplined approach to valuation, and as a consequence we will advise David Jones today of the withdrawal of our proposed merger of equals," Myer said in a statement.