JD Sports Fashion has confirmed that it is in early talks to buy rival sports chain JJB Sports.
JD said it is in “early stage discussions with the board of JJB Sports in relation to making an offer for JJB Sports”.
It said: “There can be no certainty that an offer will be made by JD Sports Fashion for JJB Sports, nor as to the terms on which any offer might be made.”
JJB also confirmed the talks. It said: “JJB Sports confirms that it is in initial discussions with JD Sports Fashion in relation to a potential offer.
“The highly preliminary nature of these discussions is such that there can be no certainty that any offer will be made or as to the terms of any offer.”
According to Sky News, JJB Sports would be worth around £30m.
JJB’s poor performance has continued since it revealed its capital raising plea for £30m before Christmas. Like-for-likes were down 11.1% for the period between December 20 to January 23. Year-to-date like-for-likes to January 23 were up 6.2%. Its net debt at January 27 was £21.3m. Its year end is January 30.
The retailer also confirmed its major shareholders Harris Associates and Crystal Amber have backed its £30m capital raising and both backers will have the right to nominate a non-executive director on the JJB board.
The retailer predicts these funds will provide working capital until the end of April, although it warned if trading falls below forecast it could experience a funding shortfall by the last week of March. JJB also revealed its intention to move from the main market to AIM.
JJB said Bank of Scotland has amended the terms of its credit facility, with the bank agreeing to waive its covenant tests in April. It has previously waived the test due in January this year, which JJB warned it was likely to breach. The sports retailer must satisfy stock cover tests each month until June 2011 as part of the deal.
JJB is delivering a restructuring plan to the bank by February 24 and will update on its progress on a weekly basis from that point.
Regarding a possible takeover by JD, Singer Capital Markets analyst Matthew McEachran said JD’s top team of chief executive Peter Cowgill and chief operating officer Barry Bown have “proven strength in operational management and if anyone stands a good chance of turning round the fortunes of JJB they do”.
He said: “They already have strong and established relationships with key brands Nike and Adidas, whose support is vital to the future of JJB.”
He said the deal has its risks given JJB’s current position, with a net debt of around £25m and the funding shortfall could be around £25m.
“The entire exercise could cost between £50-100m prior to any equity value, albeit trading losses and integration costs could be funded from ongoing cashflow,” he said. “JD’s current cash surplus looks capable of funding the upfront deal costs.”