Learn why acquisitions make JD Sports more competitive

In my previous JD’s post, I mentioned the success of the company. One contributing factor is JD Sports acquisition strategies.

Below is a look at seven acquisitions that JD has made. Some will include previous financial results, so you can judge whether these are good acquisitions.

Afterwards, we evaluate how these acquisitions propelled the status and branding of JD Sports.  

 

The Seven Acquisitions made by JD Sports

 

Chausport

In 2009, JD bought this French Sportswear for €8m or £7m. The accounts ending in December 2007 has reported a turnover of €40.7 million and pre-tax profits of €600,000.

The 78 stores obtained by JD Sports would help promote themselves in the French market.

 

 

Canterbury Europe

JD bought this business for £6.5m in 2009 but then sold it to Pentland Group for £22.7m, three years later.

At the time of purchase, Canterbury Europe had sales of £29m with operating loss of £500,000.

That sales made JD £16.2m or 170% investment return. 

Regardless, here is a brief financial history of Canterbury Europe.

Table 1

Canterbury Europe financials

BLACKS Leisure

In 2012, JD Sports made the winning bid and bought Blacks Leisure for £20m. The money goes to paying the loans Blacks owed to the banks leaving their shareholders in the dust.

Go to the Companies House website, last accounts filed were for 2011. In it, Blacks owned three brands (Blacks, Millets and Freespirit). The subsidiary has a total of 308 stores to JD’s 500 stores. Also, Blacks has sales of £200m. Below is the details of the subsidiary business:

Table 2

Blacks Leisure financials

How does this acquisition compare with JD Sports valuation?

On the basis of sales, JD bought Blacks on a Price to Sales = 0.1, while JD’s sales value it on P/S of 0.31.

On a Price to Book basis, the market values JD at 1.6 times, whereas JD bought Blacks on 0.6 times.

 

What makes this acquisition successful?

Remember, I mentioned 308 stores (ignoring Freespirit, this goes down to 290) owned by Blacks before JD Sports acquired it.

On 2016’s JD Sports annual report, the total numbers of Blacks and Millets store, combined fell to approx. 160. The closure of 130 stores would lead to lower sales. So, this would increase operational efficiency leading to profitability.  

 

 

 

Kukri Sports Limited

JD bought this kit manufacturer for more than a £1m (assume it is under £2m) in 2011 or 80% majority stake in the company. Turnover for Kukri in 2010 is £13m but has negative equity of £2.3m.

This is Kukri Sports financials in the last three years:

 

Table 3

Kukri Sports Limited Financials

 

Champion Sports (Holdings)

 

JD Sports bought Champion for €20m. Champion has a turnover of €54m in 2009.

 

Go Outdoors

In one of JD biggest and latest acquisition is this outdoor retailer for £112.3m deal. It has revenue of £202.2m with a £4.9m profit before tax or £3.7m in net profit.

The company operates 58 stores in the UK, which was owned by private equity owners YFM Equity Partners and 3i Group.

This business has similar revenue numbers to Blacks, but JD paid six times more for Blacks. At least Go Outdoors is expanding and profitable, but we can’t argue that JD turnaround (the closure of 130 Blacks stores) would make Blacks profitable today.

Only time will tell if this latest acquisition earns JD Sports high returns from investments.

Below are the financial numbers for Go Outdoors:

Table 4

Go Outdoors financials

Sports Unlimited Retail BV

Another 2016’s acquisition is two Dutch Sports Business by setting up a new Dutch subsidiary called Sports Unlimited Retail BV. The names of the two businesses are called Aktiesport and Perry Sport.

The thing is JD buys them from a Trustee called Unlimited Sports Group BV. Afterwards, it will declare bankruptcy (you can’t make this stuff up).

The cash consideration of €26.5m (£20.9m) is payable. But excludes fees, retention of title and other claims arising consequent upon the bankruptcy process.

On both these businesses financials:

For the year ended 31 December 2014, the combined Aktiesport and Perry Sports businesses delivered consolidated revenues of €159.4m, an operating profit of €1.5m, a profit before tax of €0.2m and gross assets of €67.4m.”

 

Okay, we learn a lot about JD acquisition strategy, although some of them are new and require time to pan out.

What have we learned from these acquisitions?

 

JD Sports acquired £657m of sales for £184m

The ultimate truth of JD Sports secret recipe for acquisition revealed.

About the seven acquisitions made by JD and mentioned in this post.

JD bought in sales of £657m by paying £184m for these businesses. That is 0.28 times of acquired sales. Meanwhile, JD Sports has an average price to sales ratio of 0.52 times in the past eight years.

Remember, if JD Sports pursue a cost-cutting strategy, then a further reduction in sales is likely, but with a higher probability of profitability. But, at the same time, if JD market their brands alongside the acquired brands it would increase sales.

 

Why JD manages to increase margins?

In my last JD’s post, I discuss one factor of share price appreciation success is down to the ability to increase their margins. (the link is found at the beginning of the post)

That big contributing factor is down to the reduction in competition at the domestic UK markets. Secondly, JD management acts like private equity firms. By cutting excess cuts and turning their subsidiaries around.

Lastly, JD bought these businesses at the bottom of the market or from an administration. That means JD did not need to borrow money externally (saving interest costs). Also, they pay as low as possible to shorten payback period and can generate higher returns from investments.

So, is it surprising that JD manages to achieve capital gains of over 1,500% between 2007 to 2016? Compare that to the previous decade (1996 to 2006), JD shareholders lost 8% on initial investment!

 

Call to Action

So, have you learn anything from JD’s acquisition strategies?

Or, are there other factors I have not mentioned which are detrimental to JD success?

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