The deal most likely for The Good Guys

good guysIs the Muir family finally closing in on a suitor for The Good Guys white goods and appliances chain?

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The future of The Good Guys white goods and appliances chain will depend on whether or not the price is right, with a little competitive tension between potential suitors thrown in for good measure.

Market speculation on the value of The Good Guys is still well shy of the expectations that the Muir family have for the retail chain that they launched with a single store in Melbourne’s northern suburbs in 1952.

The Good Guys has had an ‘open to offers’ sign above its door for five years, but has found potential suitors, including JB Hi-Fi and Woolworths, reluctant to pay the $1 billion plus price tag sought by the Muirs.

The price tag is virtually twice the jackpot that Anchorage Capital generated in listing the now failed Dick Smith on the Australian Stock Exchange in 2013.

The Muirs have been restructuring their business model to make it more attractive to potential suitors or to a public float and have now attracted a re-look at The Good Guys by JB Hi-Fi and other potential trade buyers.

However, it is understood that the Muir family is not keen to lower their price expectation for their 100-store network and are using the float strategy to argue the value of their business.

The prospect of an exit strategy for the family via a public listing is one of several changed variables that have prompted re-consideration of a takeover by JB Hi-Fi, Harvey Norman and other prospective buyers.

The other variables include the recent collapse and market exit of Dick Smith; the maturity of the store networks of both JB Hi-Fi and Harvey Norman; and JB’s drive into the whitegoods and appliances categories through its ‘Home’ retail format.

JB HI-FI Electrical appliances shop AustraliaWhile JB Hi-Fi has formally advised the Australian Stock Exchange that is participating in preliminary and non-binding talks with the Muir family and Harvey Norman has indicated it would also consider an offer, there are other possible suitors for the chain that may be prepared to pay a slight premium for The Good Guys’ store network.

They include Wesfarmers, Woolworths, Myer, Steinhoff International and private equity firms, including Bain Capital, as well perhaps David Jones, or another international retailer in the whitegoods and electrical category keen to enter the Australian market.

The tantalising prospect of The Good Guys for most other retailers and would-be buyers is a none-too-modest walk up market share of around 12.5 per cent and sales of more than $2 billion. However, the motivation for Wesfarmers, Woolworths, Myer, JB Hi-Fi and Harvey Norman is sales and growth and an earnings boost if operating synergies are proven to be available.

Sticking points for suitors

The key issue for all suitors is whether or not The Good Guys, as a business in its own right, still has growth potential after unlocking its franchise business model and in the face of competition from other retailers and internet competitors such as Kogan.com and Appliances Online.

For Harvey Norman and JB Hi-Fi, the two leading retailers in the categories in which The Good Guys trades, the motivation is a little different.

For those two retailers, it is about eliminating a sizeable competitor and assuming a dominant share above 25 per cent of the total market, a remarkable bonus following the Dick Smith collapse.

Wesfarmers is arguably the least likely suitor, although the company has flagged an interest in acquisitions and could conceivably assess whether or not The Good Guys network and categories could fit with the restructured Kmart and Target business.

Searching for new growth opportunities, Woolworths has also cast a serious eye over The Good Guys previously. But the organisation baulked at the Muir family’s price tag and franchise structure, opting instead to venture into hardware with the now failed Masters Home Improvement chain.

Woolworths is now wading through the messy process of extricating itself from its hardware foray and is trying to rebuild its credibility and sales and earnings momentum.

Buying The Good Guys is not without logic on the growth objectives, but would be a brave call given Woolworths’ current standing with investors.

Myer is in a similar position to Woolworths in terms of the need to secure growth opportunities, but a bid for The Good Guys would also likely test Myers’ investors at this point.

Low margins in the electrical goods categories have previously forced a retreat from the categories by Myer. And the Richard Umbers-led department store chain is currently in the process of reducing its floorspace and locations, rather than showing any appetite for acquiring a new store network.

David Jones contracted out its electrical sales to Dick Smith, believing the specialist in the category would achieve better results – an expectation that was not to be realised.

A David Jones play would be somewhat surprising, but not totally out of the realms of possibility, for the listed South African Woolworths Holdings company that owns the Australian department store chain, along with Country Road, Witchery, Trenery and Mimco.

Steinhoff International, also headquartered in South Africa, has already discussed the acquisition of a controlling interest or outright ownership of The Good Guys with the Muir family.

Through its Australian subsidiaries, Steinhoff owns Freedom Furniture, Snooze, Best & Less, Harris Scarfe and homewares and electrical goods store, Poco, which has two large footprint stores in Sydney but little apparent prospect of a national rollout in the competitive market.

Steinhoff International has extensive retail interests around the world, including electrical, whitegoods and home entertainment brands, and the acquisition of The Good Guys would make more sense than persevering with a Poco store rollout.

The American retail, Best Buy, was another interested party several years ago when the Muir family first indicated they were open to offers and no doubt several Asian retailers have, at least, given a passing thought to The Good Guys opportunity.

Bain Capital is said to have considered acquiring The Good Guys, but the challenge for private equity firms is how to realise a significant gain within a three- to five-year timeframe through revamping of the product ranges, expanding the store network or finding other similar businesses to merge with or bolt on to.

Valuing The Good Guys

The Good Guys currently has around 100 stores throughout Australia and has been progressively buying out the 56 that operated under franchise management agreements, a move that was crucial to realising a sale price anywhere near the $1 billion the Muir family has been chasing.

Even with the business model revamp, financial analysts believe The Good Guys would, at best, be valued at between $800 million and $900 million.

After the Dick Smith collapse, a public listing would seem unlikely to extract a premium price, leaving the JB Hi-Fi or Harvey Norman trade sale options as potentially the best exit option for the Muir family in terms of a sale price.

harvey norman bondiBoth JB Hi-Fi and Harvey Norman would generate a vigorous evaluation of the competition implications by the Australian Competition and Consumer Commission. However, a final tick of approval would be anticipated.

With the notification of the JB Hi-Fi talks with the Muir family, Gerry Harvey, executive chairman of Harvey Norman, has indicated he would consider paying up to $900 million for The Good Guys if the ACCC would grant approval to the takeover.

Harvey believes the chain would be a good fit with his Harvey Norman and Domayne chains. His initial thoughts would see The Good Guys brand retained and a reversal of the franchising buyout decision.

JB Hi-Fi, on the other hand, would not want to continue the franchise business model, but would be keen to add the $2 billion in sales The Good Guys generates to its own annual revenues of around $3.8 million.

In revenue terms, the acquisition of The Good Guys would position JB Hi-Fi as the sixth largest retail company in Australia, behind Wesfarmers, Woolworths, Aldi, Harvey Norman and 7-Eleven.

Harvey Norman’s revenues would jump from around $6.2 billion to more than $8 billion if it were to succeed in taking over The Good Guys.

The deal most likely

JB Hi-Fi looks the best fit for an acquisition with the chance to significantly expand its market share in whitegoods and appliances and to build on its successful development of the JB Hi-Fi Home store format it launched in November 2012 after learning the lessons of a difficult integration of the Clive Anthony chain in Queensland.

There are currently around 43 JB Hi-Fi Home stores around Australia with a target of 58 by the end of 2016, then 75 by year-end calendar 2017.

Richard Murray, JB Hi-Fi CEO, passed on buying any of the Dick Smith stores when that chain collapsed earlier this year because they were too small for his chain’s formats, particularly with the continuing development of the JB Hi-Fi Home format, which includes whitegoods and electrical appliances.

The average JB Hi-Fi store generates around $20 million per year, a similar revenue profile to The Good Guys stores, which have large store footprints consistent with the contemporary JB Hi-Fi Home format.

Acquiring The Good Guys’ 100-store network would lift JB Hi-Fi’s store numbers to around 300, albeit there might be some rationalisation necessary on clash sites.

For a company that has prospered almost entirely on organic growth, this acquisition would present some challenges in the integration of systems and cultural change in The Good Guys business. However, it would significantly boost JB Hi-Fi’s buying power while further consolidating the retail category.

JB Hi-Fi’s remarkable success in the past 42 years has seen off retailers such as Clive Peters, Brashs, Megamart, WOW Sight & Sound, Retravision, Betta Electrical and other independent hi-fi stores.

JB Hi-Fi has been one of the best performing retailers in Australia for at least two decades and regards it move into appliances as “a natural adjacency” to the retailer’s successful consumer electronics categories.

JB Hi-Fi certainly looms as the ‘deal most likely’ for the Muir family, provided it can clear the ACCC’s competition assessment, the as yet unresolved franchisee buyouts of The Good Guys’ franchisees and the resolute expectations of the vendor on the price tag.

JB Hi-Fi will be mindful of the risks of buying up The Good Guys, but also knows the value of a deal today would be significantly greater and no more costly than the same opportunity it passed on around five years ago.

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