Does JB Hi-Fi Limited face a bidding war over The Good Guys?

Credit: Peter Heath

JB Hi-Fi Limited (ASX: JBH) could face a bidding war for The Good Guys chain with retail billionaire Gerry Harvey announcing that he may consider bidding for the consumer goods retailer.

JB Hi-Fi confirmed yesterday that it was in preliminary discussions with The Good Guys in relation to a proposed sale of The Good Guys, but that no decision had been made nor any agreement reached.

Mr Harvey, chairman of retailer Harvey Norman Holdings Limited (ASX: HVN) has told The Australian that he was still studying the implications of JB Hi-Fi taking over The Good Guys, but that he would ‘probably gather his troops for his own bid’, and had called on the Australian Competition and Consumer Commission (ACCC) chairman Rod Sims to discuss the situation.

Mr Harvey said, “It might be a bit difficult because the ACCC might knock me back, but if they are going to let JB Hi-Fi buy it, then they would have no reason they would stop me.

I would probably ring up Rod Sims and say ‘mate, what do I do?’ But I’ve only just found out (about JB Hi-Fi’s move) so l’ll have some time to think about it.”

Harvey Norman has a market cap of $5.1 billion, compared to JB Hi-Fi’s $2.4 billion and would probably find it a bit easier to swallow the $800 million to $1 billion required to buy The Good Guys.

The Good Guys has annual revenues of around $2 billion, and earnings before interest, tax, depreciation and amortisation (EBITDA) of around $80 million in the 2015 financial year (FY15). It’s the third-largest home appliance retailer in Australia behind Harvey Norman and JB Hi-Fi but believes it’s the market leader when it comes to white goods.

The key differentiator between JB Hi-Fi and Harvey Norman bidding for The Good Guys is that JB Hi-Fi has only recently moved into selling white goods and appliances and expects to have 58 HOME stores by the end of FY16. Harvey Norman sells white goods and appliances through most of its 277 sites, and as such would present the ACCC with a more difficult equation when it came to reducing competition.

However, recent IBIS analysis suggests that a Harvey Norman-The Good Guys combined operation would still have less than 30% of the domestic appliance retail market with JB Hi-Fi on ~14%.

Foolish takeaway

My personal view is that JB Hi-Fi has a much better chance of gaining ACCC approval for its bid for The Good Guys compared to Harvey Norman, but either retailer could conceivably make a successful takeover bid.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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