Can JB Hi-FI Grab a Bargain at The Good Guys?
JB Hi-Fi has made no secret of its desire to snap up The Good Guys. The fact that its share price is trading at a premium to consensus suggests it will not only bid successfully for The Good Guys, but get it for a good price too. But big questions hang over both the success of the bid, and what price they will pay.
Empirical research has shown that takeovers typically favour the fortunes of the seller over the buyer. Conceptually, the acquirer could benefit by buying the business at a discount to its stand-alone value, which may arise in the event of a forced sale or if the sale process is uncompetitive. In a competitive tender, the bidder that is best placed to benefit from a deal is the one that can generate the highest synergies (but that’s not to stop others from bidding aggressively).
So let’s examine these dynamics in the context of JB Hi-Fi’s pursuit of The Good Guys.
The owners of The Good Guys are concurrently pursuing an IPO and a trade sale. Clearly the owners are not forced sellers here. In fact, the IPO effectively sets the floor price for the owners because the business could be sold on a stand-alone basis. So it’s unlikely that JB Hi-Fi can secure the company at a meaningful discount to its stand-alone value.
A trade sale should result in a higher price for the owners as it allows bids from companies that can unlock synergies (the concept that a combined entity is worth more than the sum of its parts). For instance, while there is modest overlap between JB Hi-Fi’s core electronic business and The Good Guys’ core whitegoods business, the combined entity would have greater buying power and the potential to reduce costs through common infrastructure.
If JB Hi-Fi was the only bidder for The Good Guys then theoretically they could bid $1 higher than what the market was willing to pay for the stand-alone business (assuming that their required return was the same), and the value of the synergies could then be reflected in its share price. But are these synergies unique to JB Hi-Fi?
Well, Harvey Norman is the primary domestic competitor that could generate meaningful synergies from the deal, and it has expressed interest in bidding for The Good Guys. However, when the ACCC announced it would not oppose JB Hi-Fi’s bid for The Good Guys it cited a greater overlap between The Good Guys and Harvey Norman, which suggests that it would not look favourably on a bid by Harvey Norman.
This is a positive for JB Hi-Fi, but it doesn’t reduce the potential for an international firm to bid for The Good Guys. Australia is an attractive market, and the sale of an established player provides a means to gain scale quickly. A multinational could generate material synergies with its global buying network. What’s more, with interest rates at record lows around the world, their required return may be lower than what JB Hi-Fi is willing to accept.
An important consideration is that JB Hi-Fi does not need to acquire The Good Guys. It is gradually rolling out its HOME stores well and management is prudently considering the most effective capital management for shareholders. As such, JB Hi-Fi management will likely exercise discipline when bidding for The Good Guys.
So overall, additional value could accrue to JB Hi-Fi shareholders if it bids successfully, but this is really conditional on it being the only large player involved in the process. While domestically it is well placed, we feel there is meaningful risk that an international player could throw its hat into the ring.