- Deal priced at 21% premium
- Purchase is earnings-accretive
- US now 40% of group revenue
JD Sports Fashion (JD.) was one of the top gainers in the FTSE, gaining 7% to 126.1p as investors sensed a win-win outcome following the acquisition of US rival Hibbett (HIBB:NASDAQ) for $1.1 billion (£899 million) in cash.
The proposed transaction values Hibbett at $87.5 per share, equating to a 21% premium to its closing price on Monday (22 April). In pre-market trading, Hibbett shares were trading up around 15% at $83.50.
JD shares are down 22% year to date following a profit warning (4 Jan) with the company citing higher costs and subdued demand for apparel.
WHAT DID THE COMPANY SAY?
JD chief executive Regis Shultz said: ‘This acquisition is in line with our strategic priorities and is a very important transaction for our strategic and financial development.
Strategically, it enhances our presence within North America and achieves our objective of strengthening our Complementary Concepts division. Hibbett's footprint is highly complementary, adding a stronger presence in communities across the southeastern US, where we currently have a limited presence. It will also provide a stronger platform for the rollout of the JD fascia in the US.
The proposed deal will be financed via existing cash resources of $300 million and a $1 billion extension of the group’s existing banking facilities.
The company said the combined group would retain a strong balance sheet following the transaction with net debt to EBITDA (earnings before interest, tax, depreciation, and amortisation) of just 0.2 times.
The acquisition is anticipated to be accretive to earnings in the first full year of ownership before benefits from annual cost synergies which are expected to total more than $25 million a year.
WHAT ARE THE EXPERTS SAYING?
Retail analyst Clive Black at Shore Capital said in isolation the deal looks sensible, although some investors might perceive the opportunity cost to be more share buybacks at a low rating.
AJ Bell investment director Russ Mould commented: ‘UK retailers haven’t always fared too well in the States but JD’s 2018 acquisition of Finish Line has proved a rare success story as the company leveraged the experience of the latter’s US management and built on this success with a further deal for Shoe Palace a few years later.
‘This deal is for an established brand which dates back to the 1940s and has good relationships with other leading sportswear brands as well as operating from prime locations.
‘Time will tell if this was the right use of capital over and above further returns to shareholders or buying back stock after a difficult period for the share price.’
Discalimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (Martin Gamble) and the editor (Ian Conway) own shares in AJ Bell.
