Here’s a billion dollar question for investors – and regulators. Should JB Hi Fi (JBH) be allowed to buy its smaller rival, The Good Guys, or will it further reduce competition already hit by the collapse of Dick Smith?
After the Financial Review reported looming deal, JB Hi-Fi chief executive Richard Murray was forced to confirm the story that JB Hi Fi is in preliminary discussions to buy The Good Guys.
Analysts say that if approved by competition regulators and shareholders, the deal that could transform JB Hi Fi into Australia’s largest home appliances chain, in front of Harvey Norman.
But Gerry Harvey says that if the ACCC gives the OK to JB Hi Fi buying the Good Guys, he will look at making a bid via Harvey Norman.”(I)f there is an argument they (JB Hi-Fi) could buy it, then equally there is as good an argument that we could buy it,” Mr Harvey said. “I would seriously look at it if I could get clearance from the ACCC.” he told Fairfax Media.
Given the improved market position for JBH, approval from the ACCC will be necessary and might not come easily without some concessions, such as sale of certain stores where there is an overlap.
Harvey told Fairfax he would pay around $900 million for the Good Guys and would re-franchise it if he got control.
The media reports said JB Hi-Fi has made an indicative offer for the 100-store The Good Guys chain, which is considering a $1 billion stockmarket float or trade sale. Seeing JB HI Fi has a market value of close to $2.4 billion, it would require a big issue of shares and some debt to complete the deal.
While Mr Murray said the discussions between JB Hi-Fi and The Good Guys were preliminary and exploratory in nature, the market fell in love with the idea and pushed JB Hi Fi shares up more than 3% to $$23.63 – which went some way to reversing the near 7% slide in the share price since late last week.
“JB Hi-Fi has made no decision and nor has it entered into any agreement with respect to the acquisition of The Good Guys,” Mr Murray said in the statement.
"JB Hi-Fi understands that The Good Guys are looking at a range of options including an IPO on the ASX.
“JB Hi-Fi evaluates all possible opportunities against a range of factors and would only pursue an acquisition if it made compelling financial sense for our shareholders," he said.
If the deal happens, it will see JB Hi Fi complete its push into the home whitegoods market in one fell swoop.
JB Hi-Fi first ventured into the $4 billion home appliances market in 2012, adding whitegoods, cooking appliances and small appliances to its range of consumer electronics in existing stores and new stores.
It now has 43 JB Hi-Fi Home stores and another 50 JB Hi-Fi stores carry a range of small appliances.
Mr Murray told investors earlier this month that he expected to have 58 Home stores by the end of this year and to reach 75 by the end of 2017. Now that could be achieved in a matter of months, ACCC willing.
If JB Hi-Fi buys The Good Guys it would boost JBH’s total sales from $3.9 billion to almost $6 billion, add $110 million to earnings before interest tax depreciation and amortisation – before cost cutting benefits – and lift JB Hi-Fi’s total store number from 194 to almost 300 stores.
However, Fairfax media says JB Hi-Fi will be competing with private equity bidders, including Bain Capital for The Good Guys, while the stock market float option remains on the cards.
JBH is being advised by Macquarie Capital. Media reports have named South African retailer Steinhoff International, which owns furniture chain Freedom, as a possible rival for The Goods Guys. But it has recently tried to expand into Europe and being a foreign company, would not be able to move as quickly as JBH, if it wants to.
Earlier this month JB Hi-Fi confirmed it still expects total sales of around $3.9 billion in 2015-16, up from $3.65 billion in 2014-15, and net profit in the range of 143 million to $147 million, up from the previous year’s $136.5 million.
JB Hi-Fi is confident its sales will continue to grow, driven by promotions and new tax cuts for small businesses. Sales rose 8.6% in the three months to March, while same store sales, which excludes the impact of new stores and closures, were up a solid 5.2%.
JB Hi-Fi said the sales growth was pleasing given Easter fell inside this period in 2016. The company said it has a strong promotional plan for May and June, and latest federal budget tax incentives for small businesses should also help sales.
