Shares in trainers-to-tracksuits seller JD Sports Fashion (JD.) edged 0.5% higher to £10.45 on Thursday even after the retailer’s acquisition of Footasylum was provisionally prohibited again by the Competition and Markets Authority (CMA).
Having reassessed the merger, the CMA still argues JD Sports’ takeover of Footasylum ‘could lead to a worse deal for shoppers’, while JD Sports struggles to understand how the merger could substantially lessen competition in a market being shaped by the direct-to-consumer (DTC) strategies of Nike and Adidas.
The Footasylum merger case had gone back to the CMA in March 2021 after the original prohibition on the deal was quashed by the Competition Appeal Tribunal.
This tribunal noted that the CMA had ‘acted irrationally in that it did not have the necessary evidence’ in relation to its conclusions on the possible effects of the pandemic on the sports fashion market.
PIVOTAL FAILING
In its ruling, the tribunal found that a pivotal failing of the CMA was its lack of inquiry into the increased competitive threat from the likes of Nike and Adidas increasingly selling direct-to-consumer, with temporary store closures under lockdown shifting even more spending online and accelerating their DTC strategies.
Retailers including JD Sports and Footasylum are reliant on Nike and Adidas for these sought-after branded products, but are also having to compete hard against their growing DTC operations.
At this stage, the CMA’s view is that ‘blocking the deal, by requiring JD Sports to sell Footasylum, may be the only way of addressing these competition concerns’.
PUNCHY RESPONSE
In a punchy response, JD Sports said it finds it ‘surprising’ that these key facts have ‘changed so substantially but the CMA’s conclusion has not’ and will ‘continue to make our case strongly to the CMA before it releases its final report’ next month.
JD Sports’ executive chairman Peter Cowgill, commented: ‘We have made compelling submissions on the committed positioning of the global brands towards direct-to-consumer and the consequent impact on an extremely competitive marketplace.’
Perplexed and again disappointed that these have been rejected, Cowgill is ‘not sure what further evidence the CMA needs to appreciate the extent of this dynamic change which has been substantially accelerated by COVID-19.’
Urging the CMA to reconsider its position before making its final determination, Cowgill insisted the deal ‘will simply not “lessen” competition, let alone “substantially”. On the contrary, clearance would enable JD to invest in Footasylum and work with its management team to increase the quality, range and choice of products available to its consumers which will bring wider benefits to a UK high street decimated by a number of high-profile closures.’
THE EXPERT’S VIEW
Russ Mould, investment director at AJ Bell, said a forced sale of Footasylum would be ‘annoying but unlikely to be catastrophic’ to JD Sports’ earnings.
‘Owning Footasylum has given the group a stronger presence on the high street, however fundamentally the direction of travel for nearly all retail businesses is online. JD’s brand is significantly stronger than Footasylum’s which means it is likely to be front of mind for online shoppers.
‘What’s certain is that the endless probes by the authorities since the Footasylum acquisition was announced have been a major distraction to JD management. They might even wish the deal had never happened at all.’
