Why the JB Hi-Fi Limited share price is surging on its Good Guys deal

Credit: Peter Heath

Shares of JB Hi-Fi Limited (ASX: JBH) have reopened for normal trade today following a trading halt in relation to its acquisition of The Good Guys.

Investors are clearly pleased with the deal, pushing the share price 5.9% higher to $30.54. They were trading as much as 7.9% higher at $31.14 earlier.

The purchase of The Good Guys by rival electronics retailer JB Hi-Fi brought an end to a long run of speculation regarding the businesses, with JB Hi-Fi finally committing to acquire the chain for $870 million.

Some concerns were expressed by analysts that the expected synergies of $15 million to $20 million were below their initial forecasts, while some questioned why it would take up to three years to achieve those savings.

Meanwhile, some have also questioned how the cultures of the two businesses will mesh together. To borrow a line from The Australian Financial Review:

“Unlike JB, where everyone ultimately works for (CEO Richard Murray), The Good Guys has, until recently, been run as a series of joint ventures between the company and a big group of store owners.”

Ultimately, that is likely one of the reasons why the expected synergies are lower than the forecasts from many analysts. JB Hi-Fi will take its time in integrating the business, including maintaining two separate headquarters, in order to mitigate the integration risk.

Nevertheless, investors appear to be excited over the market share gains that will be enjoyed by JB Hi-Fi (more details, here) and believe Richard Murray is capable of combining the two businesses to create value for shareholders.

JB Hi-Fi’s shares had experienced a significant run-up in price in the lead-up to the announcement earlier this week, with many investors expecting it was only a matter of time before a deal would be reached.

Although they are still worth a closer look by long-term investors, investors should also note that while the acquisition could create value, it also introduces a number of investment risks. Investors should do their own due diligence and decide whether an investment in JB Hi-Fi today is really right for them.

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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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