JB Hi-Fi Limited: The next takeover target?

Speculation about ‘which stock is next’ is doing the rounds, following last week’s bid by South Africa’s Woolworths for department store retailer David Jones Limited (ASX: DJS).

Now the Australian Financial Review (AFR) has put the spotlight on consumer electronics retailer JB Hi-Fi Limited (ASX: JBH), suggesting it could be the next retailer taken out by a bigger predator.

The AFR says there are observers who believe a predator could be running the ruler over the $2 billion JB Hi-Fi, including conglomerate Wesfarmers Limited (ASX: WES). Despite Wesfarmers already owning Officeworks, Kmart and Target, who all sell consumer electronics in some shape or form, the AFR suggests there would be no competition issues.

Wesfarmers’ main competitor, Woolworths Limited (ASX: WOW) is seen as the most unlikely candidate, thanks to its experience with Dick Smith Electronics. Dick Smith was sold by Woolies for a pittance (an estimated $98m) to private equity form Anchorage, and re-listed less than 12 months later as Dick Smith Holdings Ltd (ASX: DSH), valuing the company at more than $500 million.

JB Hi-Fi has performed admirably over the past year or so, showing that its absolute low-cost of doing business model gives it a form of competitive advantage over other consumer electronics retailers like Dick Smith and Harvey Norman Holdings Limited (ASX: HVN).

The shares have followed, rising 49% in the past year, compared to Harvey Norman up 33.6% and the wider consumer discretionary sector at 15.5%. But perhaps the biggest cue from the Woolworths/David Jones deal is that a foreign-owned company could be the one most likely to swallow JB Hi-Fi.

Foolish takeaway

Speculating on takeover targets is pretty meaningless at the end of the day – there’s just no way to know which company could be next. Foolish investors would be wise to ignore the speculation and focus on buying great companies at cheap prices. JB Hi-Fi may well be one of those, with or without the takeover rumours.

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Motley Fool writer/analyst Mike King owns shares in Woolworths. You can follow Mike on Twitter @TMFKinga

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