Confirming press speculation, JD Sports Fashion said in a statement last week that it is in early discussions with the board of directors of its struggling rival on the British sports market, JJB Sports, about a possible takeover offer. JD stressed, however, that there was no certainty that such an offer would be made.
The combination of the two companies is intriguing financial analysts. They feel that JD is starting its discussions at an appropriate time to negotiate an interesting price and that JJB would strongly benefit from JD's proven good management and its good relations with suppliers. Big brands have refused to do business with JJB in the past for fear of not getting paid, reducing the offer and the attractiveness of its stores.
A merger would help cut central costs and negotiate better terms with suppliers. On the other hand, analysts feel that JD will have to spend a lot of money on top of a likely purchase price of around £30 million (€35.5m-$48.5m) – between £50 million (€59.2m-$80.8m) and £100 million (€118.3m-$161.6m) – to complete the refurbishment of JJB's stores, to fund its short-term losses and relaunch the banner. JD should have enough cash to finance the acquisition, in spite of other recent investments, but may need to raise additional equity from one or both of its major shareholders – Pentland Group with 57 percent of the shares and Sports Direct International with 11.8 percent.
Another question mark concerns the possible attitude of competition authorities. According to our own estimates, JD and JJB had market share of 13 and 9 percent in the U.K., respectively, in 2009, but Sports Direct alone had a bigger market share of 27 percent. Anyhow, the news about the discussions has raised the share price of both partners in the dialogue on the London stock exchange.
JD Sports Fashion has 355 sports stores in the U.K., and about 335 of them trade under its main JD banner. JJB has pruned its own store network, which now consists of 245 units. If the two big retailers come together, they will probably be positioned more clearly in two different segment of the market – sports fashion for JD and performance sports for JJB.
JD is pursuing a similar dual-banner policy in France and is planning to do the same in Ireland if its acquisition of Champion Sports (see previous issue) is completed.
Curiously; JD's latest statement on JJB came after its announcement of Champion's takeover and a statement by Blacks Leisure Group that it was terminating discussion over a possible sale of all or some of its assets. More specialized in the outdoor sector, Blacks has a market share of 6 percent. It previously owned a chain of performance sports stores, First Sport, which it sold many years ago to JD, which took off the First Sport banner from them.
