What does Frasers stand to gain from taking a £75m stake in AO World?

In a £75m deal that caught some in the City off guard, Frasers snapped up an 18.9% stake in AO from London-based hedge fund Odey Asset Management.

While AO said this was a result of two years of discussions around a potential strategic partnership between the businesses, some analysts were fascinated to see how partnering with a pureplay white goods specialist could contribute to Frasers’ increasing focus on the worlds of fashion, sports and luxury. 

AO is regaining its foothold in the electricals market following a series of cost-cutting efforts and has increased its adjusted EBITDA for the fourth time since last year to the range of £37.5m to £45m, despite reporting a 17.2% decline in sales in the three months to December 2022.

At the time, the retailer said it expects profit guidance to be “around the top end” after seeing positive movement from its strategy to reduce costs and improve margins. As AO embarks on a steady path of recovery with a focus on expanding profits in the UK having shut its international operations, it could be a profitable investment for Frasers.

Retail Week understands that AO identifies synergies in the partnership that could help it grow in terms of sales and capture a new customer demographic.

Beth Bloomfield, senior analyst at Retail Week, says: “Given AO increased its profit forecast in April, it is an investible business that will bolster Frasers Group’s overall portfolio, as well as potentially signalling Frasers’ intent to widen its remit and move into the electricals market.   

“Having recently acquired a handful of shopping centres, these could also serve as potential outlets for AO – which had previously trialled in-store partnerships through Tesco – enabling it to get its products into physical stores. 

”With Frasers Group’s focus on creating a world-leading retail ecosystem, AO could well venture into international territory again with the right support.”

Is it AO-K for Frasers?

This isn’t the first time Frasers Group has invested in categories other than clothing and luxury with previous acquisitions such as Game and Sofa.com.

Apart from strengthening its electrical proposition in House of Fraser stores, Michael Murray, chief executive of Frasers Group, explained the group could benefit from ”AO’s valuable know-how in electricals and two-man delivery, helping us to drive growth in our bulk equipment and homeware ranges” – namely Sofa.com and gym equipment it sells through Sports Direct.

Zoe Mills, lead analyst, retail, at GlobalData says the move makes a lot of sense for Frasers from an operational point of view.

“This partnership could offer a two-fold benefit for Frasers. Within its House of Fraser stores, its electrical proposition is far weaker than competitors such as John Lewis & Partners and a strategic partnership here could enhance its electrical range or at the very least supplement its electrical products with AO’s expertise in the sector to improve customer service,” she explains. 

“Equally, with AO starting in major electricals, its logistics in two-man delivery could enhance Frasers’ own fulfilment capabilities for similar categories such as furniture. 

“This isn’t the first time Frasers has delved into electricals and entertainment categories having acquired Game previously and this could be the next development for the retailer in this sector to create a more well-rounded proposition in its department stores.”

At World Retail Congress in April, Murray said the group expects “more than one, no more than 10” acquisitions by the end of 2023. As Frasers invests in AO and engages in a corporate tug-of-war to emerge as one of the biggest shareholders in Asos, it reiterates the group’s belief in its acquisition strategy.