JB Hi-Fi Limited to bid for The Good Guys: What you need to know

Credit: Peter Heath

It is still unclear how the Muir family will sell The Good Guys, its appliance and electronics retail chain, although a number of parties are said to be interested in a strategic acquisition.

Based on various reports, it seems an initial public offering (IPO) is still on the cards, although the recent demise of Dick Smith Electronics may have dampened the market’s appetite for new retail shares.

That was perhaps reflected during the recent IPO of Ltd (ASX: KGN). Its shares slumped on their first day of trade, although they have managed to regain some composure in the time since.

In addition to the IPO option, there are a number of potential acquirers that are said to be interested in launching a bid for the retailer. JB Hi-Fi Limited (ASX: JBH) has arguably been the most vocal regarding its intentions to launch a takeover offer for The Good Guys, with The Australian Financial Review reporting the retailer will launch an $850 million bid for the business.

The media group also noted that Citi analysts believe JB Hi-Fi will pay up to 12x EBIT (earnings before interest and tax), which could still generate 8.7% growth in earnings per share if $20 million in synergies were achieved, according to their estimates.

However, Harvey Norman Holdings Limited (ASX: HVN) is also said to be interested, together with South Africa-based Steinhoff International. As such, JB Hi-Fi could have a bidding war on its hands which does present a risk in case the company overpays for the business, potentially destroying shareholder wealth.

What’s more, the electronics and appliance market has been propelled by strong conditions in the housing market, which have also benefited other retailers such as Nick Scali Limited (ASX: NCK). If the economy were to take a turn for the worse, or if house prices were to drop, that could have a negative impact on the industry as a whole which could see group sales drop.

JB Hi-Fi is a quality business, and its shares do deserve a closer look by investors. In saying that, investors should be mindful of how JB Hi-Fi, and the broader industry, would hold up in the event of another economic downturn and whether an acquisition of The Good Guys changes the group’s risk profile.

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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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