Not everyone thinks JB Hi-Fi Limited's (ASX: JBH) acquisition of The Good Guys is a great deal.
I'm one of them.
In case you missed the announcement, JB Hi-Fi is buying the Good Guys for $870 million, which includes a network of 101 stores around Australia.
The Good Guys generated $2.09 billion in sales and around $74.2 million in pro-forma normalised earnings before interest and tax (EBIT) in the 2016 financial year – which will add to JB's $4 billion in revenues and $221 million in EBIT. The combined group will have around 295 stores in Australia and New Zealand.
The deal does have some attractive points.
- JB Hi-Fi gets an instant expansion into home appliances – with market share moving from 3% to 29% compared to Harvey Norman Holdings Limited (ASX: HVN) 24%
- The demise of a key competitor in a number of categories, including home appliances and consumer electronics
- Better buying power thanks to economies of scale
- An inexpensive price paid (at face value)
- Synergies of between $15-$20 million per year after a 3-year integration period
- Earnings per share accretive (aren't they all?) by 11.6% on FY2016 pro forma results
However, there are also some major negatives.
JB Hi-Fi owns and operates all its own stores, while The Good Guys is a franchise model. That's probably one reason why the company plans to continue running two head offices, and basically let The Good Guys run as it has been run in the past.
And that was a series of joint ventures between the company and a big group of store owners. While The Good Guys bought out these joint-venture partners, some will leave the business and some are staying under 12-month contracts. That's something JB Hi-Fi has never had to deal with, or franchisees for that matter.
Foolish takeaway
I have a huge deal of respect for JB Hi-Fi and how it has navigated the changing consumer electronics space for many years.
But the biggest hurdle JB Hi-Fi faces is integrating what appear to be two very different sets of cultures. For me, that's a bridge too far and I can't see this acquisition being the 'highly complementary' buy it has been flagged as.
