JB Hi-Fi Ltd (ASX: JBH) has realised that the good old days of retailing music and electronics are over coupled with what market has seen with Dick Smith Electronics, but it is now learning to apply its clever model for retail to other new categories with the potential of huge implications for the consumer.
It seems to have adopted an approach which makes it look like a small local retailer operating on a shoestring budget and this has apparently been a recipe for success. In a few more years of expansion, it could well be a real force to reckon with.
Strategic fitting but few risks: The company’s chase of The Good Guys (owned by Muir family) seems to make sound business sense because if the acquisition is successful, it may create a business with sales of almost $ 6 billion and almost 300 stores, as per market speculations. The Good Guys (with 100 stores) may complement the strategic move into the home market as the company creates HOME stores and adds small appliances to its range of products. On the other side, this will have to be balanced well for a company like JBH that has otherwise grown organically on the back of an aggressive move to open new stores with costs kept under very tight control. Other competitors in the business are not entirely sure how the company would cope with almost 300 stores at a time when most companies are consolidating their physical businesses and looking to boost online sales.
In case the acquisition materializes then JBH can capture a big chunk of the Australian appliance market, which includes 21% share of The Good Guys, 29% share of Harvey Norman and 3% share of JB Hi Fi among others. On the other side, many experts believe that a recent buyback by the Muir family post departure of key personnel gives alarming signs for The Good Guys’ performance in the medium term.
Share strong advertising efforts: Both companies are considered to be strong and successful in the discount space and, though there may be some synergies, experts believe that the business models, branding and experience are different. The Good Guys are strong in the media domestic appliances segment, whereas JB Hi-Fi is a leading player in consumer electronics and audio visual.
The fact that the latter company is in the early stages of expansion into the appliance market, the prospect of a takeover is realistic because the acquisition would complement the current product offerings and help to achieve the projected growth of HOME stores. However, they both have strong advertising campaigns with a heavy emphasis on discounting.
Bidding price speculations: Some analysts question the timing because a lot of retailers have benefited from the strong housing cycle. No information is available on price, but it is expected to be at the top of the market and is unlikely to be cheap after the experience of the property cycle. Last year, The Good Guys were reported to be asking for $ 1.5 billion and, this time, the price is reported to be under $ 1 billion.
However, there are reports of interest from private equity firms, as well as the owner of Freedom Furniture stores Steinhoff International. The Australian Financial Review has been reported to mention that JBH is expected to launch an $850 million bid for the business. Citi analysts believe JB Hi-Fi will pay up to 12x EBIT while being EPS accretive.
JBH’s offer versus the Good Guys move for listing: The Good Guys have moved closer to a listing in the share market by appointing broker syndicate comprising IPO managers Credit Suisse, Goldman Sachs and UBS.
It is said that it would consider any alternative ownership proposals that emerge, but is in the meantime, pushing ahead with its listing plans expected to be shaping up for November 2016. Muir family may take big stake in the listing. JB Hi-Fi has said that it is not committed to making an offer and would do so only if it makes compelling financial sense for its shareholders.
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