Why JB Hi-Fi Limited might pass on acquiring The Good Guys

Credit: Peter Heath

Andrew Muir, owner of electronics retail chain The Good Guys, is still said to be weighing up the options of how to sell his company just a week before its roadshow kicks off.

According to a recent post by The Australian Financial Review’s Street Talk, the roadshow for a potential initial public offer (IPO) will begin on July 11. However, an IPO onto the Australian Securities Exchange is no guarantee with the company also considering bids from rival companies.

Indeed, JB Hi-Fi Limited (ASX: JBH) has expressed its own interest in the chain after making a bid for the business. By acquiring The Good Guys, JB Hi-Fi could significantly boost its store numbers – particularly those under its new ‘HOME’ format brand which focuses predominantly on selling white goods such as refrigerators and washing machines.

Of course, JB Hi-Fi would need to gain the necessary approvals from the Australian Competition and Consumer Commission before an acquisition could be pursued, with a decision from the regulator reportedly due on 4 August, according to The AFR.

However, it is likely that gaining approval from the ACCC would only be an initial step before an acquisition could be made. In May, The Australian reported that JB Hi-Fi’s rival Harvey Norman Holdings Limited (ASX: HVN) would also demand a seat at the acquisition table if the ACCC allowed JB Hi-Fi to proceed with acquisition talks.

What’s more, JB Hi-Fi and Harvey Norman aren’t the only companies said to be interested in acquiring the chain. South African retailer Steinhoff International and Indian conglomerate Tata could also put in a bid for the retailer, which suggests that Muir will at least entertain the idea of a private sale rather than listing his business on the ASX.

Indeed, listing the shares publicly could be risky in itself after the disastrous IPO of fellow electronics retail business Dick Smith. Investors would likely approach the business with caution which could limit the potential amount to be raised at market.

Acquiring The Good Guys would make sense from a strategic standpoint, assuming JB Hi-Fi paid a reasonable price. An acquisition would effectively merge two of the country’s biggest electronic retailers, while JB Hi-Fi could also drastically increase its store count in one fell-swoop.

By having more parties interested in acquiring The Good Guys, however, there is a risk that negotiations could become overly competitive. That could see either party bid too high for the business which would likely be damaging for investors – especially given that Muir can elect to list his company on the ASX if all else fails.

Thankfully for JB Hi-Fi shareholders, JB Hi-Fi has made a play for The Good Guys in the past, only to cease acquisition discussions based on the asking price. One would hope the company approaches the negotiations table with a similar mindset this time.

JB Hi-Fi’s shares are currently fetching $24.51 which is just 1.2% shy of their all-time high.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. 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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