Currys has found itself at the centre of a bidding war, with Waterstones owner Elliott and Chinese online shopping giant JD.com both considering takeover bids for the tech giant.
The electricals retailer said on Saturday it had rejected the book shop owner’s £700m offer as it believed it “significantly undervalued the company and its future prospects”.
On Monday, JD.com revealed it was considering throwing its hat in the ring to snap up Currys.
With two companies now vying for its attention, why has the electricals giant suddenly become a takeover target?
An ‘easy steal’
According to AJ Bell investment director Russ Mould, Currys is a “unique asset” as is the “last big UK electricals chain with a physical store estate” with all its rivals online-based.
However, the retailer is also been a bit of a low hanging fruit on the stock market with its value falling by more than a third over the last 12 months.
Investec equity retail analyst Ben Hunt describes the retailer as an “easy steal” for investment firms looking to pick up an undervalued business.
He told the BBC that the retailer has “done a lot of the heavy lifting” already for any potential suitor after wiping £300m from its annual costs in a focus on driving profitability.
The shift in strategy came after Currys revealed its adjusted pre-tax full-year profits had plunged 38% to £119m in the year to 29 April, down from £192m, weighed down by poor performance in its international arm.
The cost-saving – alongside a focus on protecting margin – has paid off as the retailer revealed last month it expects full-year profits to rise ahead of expectations, despite UK like-for-likes falling 3% year on year in the golden quarter.
Mould points out that Elliott’s takeover offer suggests the firm sees a “resilient streak” in the electricals retailer and that there is “turnaround potential”.
Could Mike Ashley enter the ring?
If Currys is entertaining takeover bids, then shareholder Frasers might put its own offer forward.
The Mike Ashley-controlled retail group has snapped up an 11% holding in the company, which it described as a “strategic investment” to “build on our foothold in the electricals industry”.
However, Mould points out that it’s unlikely Frasers would make a bid for the group.
“While it has expressed a desire to be a bigger player in electricals, it prefers to buy companies when they are on their knees, not after someone else has also pushed up the price with an offer,” he says.
However, Ashley’s Frasers could play a key role in any Currys acquisition as would-be buyers as if more than 25% of shareholders oppose a deal it could fall through.
How much is Currys worth?
Currys said it believed the “unsolicited” 62p-a-share offer it received on Friday from Elliott had “significantly undervalued” the company.
Fast forward to Monday, its share price rocketed 39% to 65p-a-share following the takeover reports.
One of the retailer’s leading shareholders told Sky News it had asked the board to hold out for at least 75p-a-share “at a minimum”, which would value the business around £800m.
However, investment bank Peel Hunt predicts the retailer will not be entertaining any offer below 80p-a-share, giving it a valuation of around £900m.
Similarly, Investec argues that Currys’ ‘Care and Repair’ and mobile businesses in the UK and Ireland could be worth over £1bn alone.
It’s clear from Currys’ response to Elliott’s offer that it sees value in “its future prospects”, which are likely to include the ‘Care and Repair’ division it has steadily been building out.
What might a new owner do with it?
JD.com’s interest in Currys comes amid speculation that the Chinese giant is looking for new sources of growth to protect it against a sharp consumer slowdown at home.
GlobalData lead analyst Emily Salter explains that while a takeover would provide the ecommerce giant with access to the UK market, “acquiring Currys would not bear fruit immediately”.
There’s still the issue that Currys has “struggled to generate growth recently due to the impacts of high inflation on consumer willingness to buy big-ticket items”, she says.
However, she adds that JD.com’s ownership could enable the retailer to bolster its online operations further helping it better compete with Amazon.
Retail analyst Nick Bubb suspects that both Elliott and JD.com are interested in Currys’ core UK business, with both possibly “looking to separate off the Nordics business”.
He explains the electricals business in the Nordic region used to be the “jewel in the crown” but has been hit by online competition and heavy discounting from competitors.
It would not be unheard of for Elliott to pursue this route, as the firm is known for pushing strategic or management changes at most of its investments.
It took a stake in shopping centre-owner Hammerson in 2018 and increased its holding to add pressure on the board to speed up the disposal of assets and change its management.
And despite Currys expecting its full-year profits to rise ahead of expectations, the adjusted pre-tax range of between £105 and 115m still falls short of the £119m it reported last year.
Bubb concludes that “how good its recovery prospects are will probably determine how high the bidding gets for Currys overall”.
With its strong market position and lowly share price, don’t be surprised if other interested parties emerge to further spice up the Currys takeover race.
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