1120 Friday 21 December 2018

Two High St. stores, both household names, both started with the same ‘Athleisure’ model in place, but different M&A activities  this year is seeing one of them falling behind in the pace… but is this marathon, not a sprint.

2018 has been the biggest year for mergers and acquisitions for British firms since ’15 with nearly a 30% increase over last year alone. Both JD Sports and Sports Direct have been involved in M&A business this year, but with very different goals in sight.

JD Sports biggest deal of the year was the acquisition of US brand The Finishing Line for £400m, a firm that has 550 stores and 375 placements within in Macy's across the States. Oh, and until the purchase, Mike Ashley had a 19.3% stake in Finishing Line. This was a deal that placed JD Sports deep within the US market and the firm announced plans to invest a further £200m in the region to keep up the momentum.

Sports Direct were very active in the M&A field this year with the high-profile acquisition of House of Fraser and beating Halfords to the purchase of Evans Cycles, plus possible bids coming in for Hamleys and Debenhams to start off 2019. The idea behind the HoF and Evans deals was to merge them with the Sports Direct brand, but this is still waiting to come into fruition as Mike Ashley negotiates with current landlords to see which, if any, stores will need to close. Unlike the JD purchase of Finishing Line, SPD’s buys are UK based, and struggling ones at that.

Following their venture into the US, JD Sport announced an 18.7% increase in their first-half-year earnings with pre-tax profits rising to £121.9m with the company citing the overseas expansion as their way of overcoming the challenges of the UK market. Conversely, Mike Ashley has gone on record several times recently to bemoan the state of retail trading in the UK, going as far as calling this past November the “worst in living memory”. With all this in mind, it would appear that in terms of numbers, the M&A from JD was better than that of SPD for the short term at least.

Year-to-date performance

Year-to-date performance

Looking at the chart above, both firms are likely to end 2018 in negative territory in terms of share price, but over the year, JD is currently performing over 30% better than its rival. And looking at their market caps, SPD currently at £1.254bn with JD over twice that at £3.257bn.

Since November, brokers including Berenberg, Credit Suisse and Peel Hunt have all placed buy or outperform recommendations on JD Sports with target prices of 530.00, 454.00 and 550.00 respectively. In the same time period, Sports Direct have received sell and hold recommendations from Berenberg and Peel Hunt respectively with targets of 270.00 and 260.00. But one stand out recommendation for SPD was from Liberum Capital reiterating their buy recommendation with a target of 520.00.

As we edge ever closer to 2019, looking at these two stocks in terms of investments is where the analysts earn their money. One of the biggest questions being asked is which model of M&A will work best in the long run, or in other words, will the UK retail sector rebound?

To get further analysis on these firms and the wider retail sector, call one of our brokers directly on 0121 454 0770 or enter you details below.

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