High street star turn JD Sports Fashion (JD.) was dealt a blow by the UK Competition and Markets Authority (CMA) today, after the competition watchdog argued shoppers could lose out following its takeover of smaller sports fashion rival Footasylum.
The CMA is currently minded to block the deal by forcing JD Sports Fashion to sell Footasylum. However, shares in JD Sports improved 3.2% to 873.2p after executive chairman Peter Cowgill issued a punchy rebuttal of the CMA’s findings combined with another positive trading update.
The combative Cowgill claimed the CMA’s decision demonstrated ‘a complete misunderstanding of our market to an alarming extent’. He remains convinced a combination with Footasylum would provide ‘significant long-term benefits to customers, colleagues and brand partners’.
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As Shares reported here, JD Sports stepped in to save embattled smaller rival Footasylum with a £90m takeover last year.
This represented a small bolt-on acquisition for the trainers-to-snazzy tracksuits seller, which had already built a strategic stake in AIM IPO flop Footasylum, a seller of ‘on-trend’ products aimed at the youth demographic that was basically running out of cash.
WHAT IS WORRYING THE CMA?
Nevertheless, the CMA has been poring over the deal. After its initial Phase 1 review raised potential competition concerns, the regulator’s in-depth Phase 2 investigation ‘has provisionally found that the deal substantially lessens competition nationally’.
This basically backs up the view of billionaire Sports Direct owner Mike Ashley that the merger would lessen competition when it comes to the sale of aspirational brands such as Nike and adidas.
The CMA has extended the deadline for its final report to 11 May and is calling for possible remedies by 25 February before it makes a final decision, although its current thinking is that blocking the deal by forcing JD Sports to sell Footasylum ‘may be the only way of addressing these competition concerns’.
In short, the watchdog is concerned that ‘the loss of competition from the merger could mean that shoppers see fewer discounts, for example from clearance sales and Black Friday promotions, or receive a lower quality of customer service. It could also lead to less choice in stores and online.’
As the CMA’s wonderfully named Kip Meek explained: ‘We’re currently concerned that shoppers could lose out after the merger, for example through fewer discounts and less choice in stores and online. This could particularly affect younger customers and students, who shop in JD Sports and Footasylum.’
COWGILL COMES OUT SWINGING
JD Sports’ supremo Cowgill (pictured below) offered a scathing assessment of the CMA’s provisional decision. He described it as ‘fundamentally flawed’ and demonstrating ‘a complete misunderstanding of our market to an alarming extent, given its six-month review’.
The no-nonsense Cowgill insisted the CMA’s findings don’t reflect the ‘intensive and dynamic competitive reality’ of today’s UK sports retail market. Retailers selling coveted third party brands are not only butting heads with each other, but also locking horns with the direct to consumer (DTC) operations of international brands like Nike and adidas themselves.
‘The competitive landscape described by the CMA is one which neither I, nor any experienced sector analyst, would recognise,’ thundered Cowgill. ‘Just take a walk down any major UK high street or search for Nike or Adidas trainers on Google and you can see for yourself how competitive this marketplace really is.’
Cowgill certainly has Shore Capital in his corner when it comes to querying the CMA’s findings. In a note published this morning, the broker said it was ‘surprised and disappointed by the CMA provisional findings on the Footasylum acquisition by JD’ and that it hopes that ‘common sense will prevail’.
Shore Capital added: ‘JD is a well-managed company with global aspirations driven by a core UK business that is resonating with consumers.
'We note that in the statement the company now expects full year 2020 to be at least at the top end of current market expectations of £434m, reflecting the strong Christmas trading period previously announced in both the UK and internationally.’
