JD takes sporting chance with proposed JJB tie-up

We imagine some investors may be a bit dubious about JD's putative bid to swallow up its ailing rival JJB Sports...

by James Taylor
Last Updated: 19 Aug 2013
Retailer JD Sports confirmed this morning that it was in early-stage takeover talks with rival JJB Sports, a deal that would create one of the UK's biggest high street chains. But although the two companies operate in slightly different areas of the sportswear market, it would still be a gamble for JD. JJB has also sorts of financial problems - it launched another cash-call this morning - and has seen sales plummet in recent months. JD, on the other hand, has continued to do very nicely throughout the recession. So why risk tens of millions of its hard-earned cash on an apparent basket case like JJB?

The retailers’ statements about the discussions - which have apparently been going on since last month - were hedged with all the usual caveats ('highly preliminary... no certainty that any offer will be made...' etc etc). But presumably JD's theory is that buying JB would increase its reach on the high street - the combined group would have about 750 stores - and give it more oomph with suppliers. And since JD is more about sports-related yoof fashion, while JJB wants to become a proper sportswear shop, there's an argument that their offerings could complement each other reasonably well.

The trouble is that JJB has gone rapidly downhill in the last couple of years. As well as all its various boardroom woes, and its recent £455k fine for misleading the stock market, its efforts to boost the top line aren't working: sales slumped nearly 16% between November 8 and December 19. As a result, it's in serious danger of breaching banking covenants. Hence why today, barely 12 months after tapping shareholders (who include, bizarrely, the Bill and Melinda Gates Foundation) for £100m, it launched yet another cash-call. This time it wants £31.5m to keep the wolf from the door.

By contrast, JD has been a model of stability, growing steadily throughout the recession. It boosted sales by 2.5% over the Christmas period, while it's just moved into the French market with the acquisition of Chausport. There's no question that it can afford to buy JJB - it has £70m cash in the bank, and JJB's market value is now just £30m. And the 30% bounce in JJB's share price suggests the approach is a welcome one. But restoring JJB to rude health will be a huge challenge; JD’s investors might reasonably argue that the requisite management time, money and attention would be better spent elsewhere.

Speaking of which, there's also another complication. Sports Direct boss Mike Ashley owns a 12% stake in JD, and since he has more to lose than anyone from a tie-up between his two biggest rivals, you'd imagine he'd fight this deal tooth and nail. Having already negotiated one extremely lucrative deal this week (the £35m sale of striker Andy Carroll to Liverpool, in his capacity as owner of Newcastle United), his dander will be well and truly up...

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