JD Sports agrees to buy Footasylum
By Oliver Haill
Date: Monday 18 Mar 2019
(Sharecast News) - JD Sports Fashion has agreed to buy smaller rival Footasylum for 82.5p per share in cash, around half the price at which it floated less than a year and a half ago.
While Footasylum has disappointed with a string of profit warnings, JD said it sees a strategic opportunity from adding Footasylum's "strong reputation for lifestyle fashion" and "slightly older" customer base than the younger teenagers which typically shop in JD stores.
JD will also be buying the business set up by the original founders of JD Sports, David Makin and John Wardle, after they exited in 2005.
The £90.1m deal is at a price 184.5% above the closing price of 29p on 15 February, when JD bought an initial 8.3% stake, and 77% above last Friday's closing price of 46.5p. JD has since built up an almost 19% stake, at prices between 50p and 75p.
Footasylum's directors and other shareholders, representing around 63% of the shares, intend to unanimously recommend that shareholders accept the offer and, with other shareholders onside, the deal has been backed by shareholders representing around 80.7% of the shares.
In its last reported results, for the 52 weeks to 24 February 2018, Footasylum generated £194.8m of revenue, adjusted EBITDA of £12.5m and profit before tax of £1.9m.
But in the first half of the latest year, while sales improved 19% to £98.6m the chain swung to a £4m pre-tax loss as gross margins were squeezed by investments aimed at future growth, with January's third profit warning since listing revealing that full-year earnings would be towards the lower end of forecasts as gross margin was savaged by heavy discounting over Christmas.
JD's executive chairman Peter Cowgill, who was promoted to CEO by Makin and Wardle before they left the business, said: "We are pleased to make this offer for Footasylum, which is very complementary to our existing businesses in the UK.
"We believe that there will be significant operational and strategic benefits through the combination of the very experienced and knowledgeable management team at Footasylum and our own expertise."
Barry Bown, executive chairman of Footasylum and a chief executive of JD between 2000 and 2004, said the board concluded that the offer "represents the best strategic option for Footasylum and its employees. It believes the offer fairly reflects Footasylum's current market position and prospects on a standalone basis and, as such, that Footasylum shareholders should be given the opportunity to realise value from the offer."
"In our view, this looks to be a complementary fascia which can benefit from JD's sourcing scale, infrastructure and potential international opportunity," said analyst Greg Lawless at Shore Capital.
With JD categorical last month that it wouldn't make a full takeover offer, but some sector watchers suggesting the investment was an attempt to block Mike Ashley's Sports Direct from swooping for a direct rival, Russ Mould, investment director at AJ Bell, said the rationale for the full takeover appears to be the exposure to a wider demographic.
"On the face of it, the offer looks pretty generous, even if it is a long way short of Footasylum's market value at IPO of £171m," Mould said.
After a few years of strong growth, he added that JD shareholders will be hoping the company isn't tripped up by its recent acquisition moves.
"Early signs from its 2018 purchase of Finish Line in the US have been positive but both it and Footaslyum were troubled businesses before being taken over. As such there has to be some risk they could dilute what has been a highly effective strategy of tapping into the 'athleisure' trend."
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