At first look, JB Hi-Fi’s keen pursuit of The Good Guys is a logical move which, if successful, would instantly create a business with sales of almost $6 billion and almost 300 stores.
And The Good Guys, with its 100 stores, would complement JB Hi-Fi’s strategic move into the home market as it creates HOME stores and adds small appliances to its range.
However, growth at JB Hi-Fi has always been of the organic kind, via an aggressive drive to open new stores while keeping a very tight grip on costs. Buying someone else’s business hasn’t been on the radar until now.
And John Winning, the CEO of Winning Group, a family company going back to 1906, says he’s not sure how he would feel having more than 300 stores when most retailers are consolidating their physical footprint as the world adapts to online sales.
Winning, a digital pioneer in his company and also the founder of Appliances Online, says both JB Hi-Fi and The Good Guys are successful businesses within the discount space.
“Although there are some synergies between the two companies, their business models, branding and experience are quite different,” he says.
“The Good Guys are strong within major domestic appliances whereas JB Hi-Fi is a leading player in AV (audio visual) and consumer electronics.”
“Considering JB Hi-Fi is in the early stages of expanding into the appliance market the prospect of a takeover isn’t completely unbelievable. The acquisition would compliment JB Hi-Fi’s current offering and help it achieve its projected HOME store growth.”
Pay Less, Pay Cash
While JB Hi-Fi stores are 100% owned, The Good Guys operate stores as joint ventures, with the founding Muir family taking an equity stake with a local operator.
However, they both have strong advertising campaigns, with discounting at the top of the page. The Good Guys was known for its loud television campaign “Pay Less, Pay Cash”. The group only recently stopped giving discounts for cash sales.
Farina Parsons, an analyst at Morningstar, says the timing could be better.
“To me it seems not the best time because we’re just coming off a strong housing cycle, which has benefited a lot of these retailers,” she says.
“They haven’t provided any information on the price but it just seems that whatever they pay will be at the top of the market. It’s not going to be cheap after the property cycle we’ve been through.”
“It won’t come cheap”
Last year, The Good Guys were said to have wanted $1.5 billion. This time the price is reported to be something under $1 billion.
But there are reports of interest from private equity groups and Steinhoff International, the owners of Freedom Furniture stores.
“I am sure they are not the only ones looking at it, so it won’t come cheap,” Parsons says. “They will have to pay a premium.”
Parsons says JB Hi-fi is well managed and has benefited from the exit of Dick Smith stores.
“They have entered the home category and it could be argued that was good timing,” she says.
Matthew Felsman, a private wealth adviser at APP Securities, says the only real corporate transactions over the last 10 years at JB Hi-fi have been share buybacks.
“At the end of the day it will come down to what outcome is the most profitable for The Good Guys, a trade sale to JB Hi-Fi, an IPO listing or a private equity sale,” he says.
JB Hi-Fi share price has been climbing today since news of negotiations to buy The Good Guys.
A short time ago, they were up 4% to $23.76. The shares, which have benefited from Dick Smith closures and from lower interest rates, are a long way from this year’s low of $17.14
More than 9% of the share register is occupied by short interest. And as the shares keep rising, those who’ve shorted the stock are being pushed into the market to buy.
“From my analysis the majority of short interest will be losing money, underwater and under pressure to cover positions (buying the stock back) from $24 or above, last trading at $23.80,” says Felsman.
“A move above $24, should see a mountain of short covering that could send JBH closer to $30 like it did in mid-late 2009 when it surpassed the 2007 high.”