For pretty much as long as China’s economic star has been in the ascendant, there has been speculation that one of its new generation of digital retail powerhouses might move to swoop on a venerable UK name.
That may now happen, as JD.com ponders a bid for electricals market leader Currys.
A potential pounce prompts many questions. First and foremost, what does a Chinese ecommerce goliath see in a fairly lowly-valued UK retailer?
That low valuation is probably key. Currys, like other retailers, has found life more difficult during the cost-of-living crisis, although there are reasons for optimism – the retailer expects its results to beat consensus.
However, Currys’ share price – 68.5p at the time of writing, and up 45% over the last few days on the back of bid interest – is low compared to heights it has previously reached. It’s down 10% over the last year and has lost almost half its value on a five-year basis.
So an acquisition by JD.com, presumably for significantly more than Elliott Advisors’ reported £700m approach that was rejected by Currys, could represent a bargain.
“While JD.com is primarily an online business, and as much a logistics giant as a retailer, it has been interested in bricks and mortar for a while”
There are reasons why it might make sense for JD.com. It faces tough competition in its domestic markets so further international earnings streams would appeal.
While JD.com is primarily an online business, and as much a logistics giant as a retailer, it has been interested in how bricks and mortar could complement its existing strengths for a while.
Last November, for instance, CNN reported that Xu Lei, chief executive of JD Retail, had acknowledged limitations of its business model and that he wanted it to “build offline stores on our own and partner with existing players”.
As well as experimenting with stores in China, such as grocer 7Fresh and department store JD E-space, last year JD.com opened two Ochama “robotic” pick-up shops carrying a wide range of goods.
JD.com also has a longstanding interest in electricals. In 2020, it made a “strategic investment” in Gome, one of China’s biggest electricals chains.
Just last November, it was reported to be interested in buying Ceconomy, owner of retailers such as MediaMarkt in Europe. There was feverish speculation then that a deal would result in a ‘flood’ of cheap Chinese products.
Whether that would be so is a moot point. However, there’s little doubt that JD.com’s digital strengths, scale and power of partnerships could complement Currys’ strengths, such as an effective omnichannel model that puts value on the power of humans – such as providing expert advice – as well as technology.
“There was feverish speculation that a deal would result in a ‘flood’ of cheap Chinese products”
The reverse view might be that, having once failed to realise the promised potential of a transformational merger with Carphone Warehouse, why would JD.com think that it could do things any differently by snapping up Currys?
Such questions will only be resolved if a deal – with JD.com or someone else – goes ahead. The short-term question returns to valuation.
If JD.com sees a great opportunity, is it offering enough money? Earlier this week Ian Lance, fund manager at the UK value and income team at Currys’ biggest investor, Redwheel, backed the retailer’s decision to reject Elliott’s offer.
He maintained that failings in the UK stock market mean some businesses are undervalued while investors put their money into the US instead.
“It seems likely that we will continue to see overseas corporate buyers step in to take advantage of the depressed valuations of UK equities, with ownership falling into foreign hands”
He said: “Unless this changes, it seems likely that we will continue to see overseas corporate buyers step in to take advantage of the depressed valuations of UK equities, with ownership falling into foreign hands.”
Part of the art of a deal is to see value where others don’t – an approach astutely adopted by tycoon Mike Ashley, whose influence as a Currys shareholder may also prove crucial in the response to takeover interest.
JD.com has said that it is only at the “very preliminary stages of evaluating a possible transaction”. If anything formal emerges, Currys shareholders should hold out for a valuation that reflects its longer-term prospects rather than any opportunistic bargain hunting. Especially as there are some grounds to hope that the consumer economy, and with it Currys’ fortunes, are improving.
No comments yet