With the wait almost over, the electronics retailer, JB Hi-Fi has announced for the takeover of the whitegoods retailer, The Good Guys for a cash consideration of $870 million (11.7x EV/FY16 pro forma normalised EBIT pre-synergies). This comes at the back of complementary customer bases and product offerings of the two companies. The proposed deal was already approved by the Australian Competition and Consumer Commission (ACCC) and will be completed late 2016 or early 2017.
 
Savings from the deal: The two businesses are said to run independently while the deal is expected to yield net synergies in the range of $15 million to $20 million per year to the combined business after a three-year integration period (excluding one-off implementation costs of between $10 million and $12 million in the first 12 months). This will be at the back of addition of The Good Guys’ 101 stores to JBH’s network of stores across Australia and New Zealand. JBH has planned for funding the deal from a combination of a share issue of about $394 million and $500 million from new and existing debt facilities. JB Hi-Fi’s chief executive Richard Murray has mentioned that The Good Guys is a high-quality Australian retailer with an excellent track record.
 

Market Share Scenario (Source: Company Reports)
 
Combined entity to compete with Harvey Norman: The Good Guys is said to enhance JBH’s offering in the $4.6 billion home appliances market. Overall, the acquisition is set to boost JBH's growth strategy for gaining market share in whitegoods, kitchenware and general home appliances. Themerged group may outweigh Harvey Norman Holdings (ASX: HVN) in terms of sales. HVN had reported its FY16 franchisee sales of $5.33 billion with EBIT of $522.5 million, while JB Hi-Fi’s revenue was $3.95 billion last year with EBIT of $221.2 million and The Good Guys reported a revenue of $2.09 billion last financial year. HVN has 24% market share while The Good Guys’ market share is about 26% in the home appliance sector. Further, JBH has reaffirmed its FY17 sales guidance of circa $4.25 billion. On the other side, HVN’s founder Gerry Harvey says the merger would not hamper HVN’s position.
 
JBH has been placed in a trading halt until the commencement of normal trading on September 16, 2016. This is said to be owing to a pending announcement about capital raising. Also, the deal is subject to appropriate closing conditions.

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