COMMENT: Harvey Norman Facing Tough New Competition Following The Good Guys Deal
Harvey Norman who never had a hope in hell of getting a shot at buying The Good Guys, is now facing some very tough competition in both the appliance and consumer electronics market following the $870M acquisition of The Good Guys by JB Hi Fi.
The combination of JB Hi Fi management coupled with the knowledge and skills of The Good Guys management team is set to put enormous pressure on Harvey Norman, whose Chairman Gerry Harvey was persona non grata in the eyes of the Muir family when it came to selling the crown jewel the family’s asset portfolio.
As the story goes Gerry Harvey, when he was first establishing the Harvey Norman empire offended Ian Muir, the founder of The Good Guys to the extent that the Muir family refused to deal with Harvey Norman management under any conditions. This played right into the hands of JB Hi Fi management.
At the same time investors were wary of putting a capital into yet another retailer following the failure of Dick Smith and for many an IPO of The Good Guys was never going to fly.
The marriage of JB Hi Fi and The Good Guys is also set for pressure on appliance vendors who in the past were not prepared to give JB Hi Fi the same deals that they were giving to Harvey Norman and The Good Guys.
At the same time, the merging of the two retail giants is also set for pressure on consumer electronics vendors who in the past have cuddled up to Harvey Norman with exclusive deals and pricing.
At the heart of the deal is an exceptional management team, who have a giant task ahead of them over the next 18 months.
Key is going to be store locations lease deals and the cutting back of costs associated with the merging of the two retail groups. Australia has one of the most brutal and competitive retail marketplaces and to be successful JB Hi Fi has to cut costs grow market share and above all have the right stores in the right locations to generate foot traffic.
Right now JB Hi Fi management is saying that it will take at least three years for the two groups to generate the level of efficiency that JB Hi Fi has a reputation for delivering.
JB Hi Fi CEO Richard Murray, CFO Nick Wells have one of the strongest board of directors behind them with the likes of former CEO of JB Hi Fi Richard Uechtritz able to deliver an in-depth understanding of not only the retail market but the fast-moving world of consumer electronics. Unlike consumer electronics appliances do not change as often as smartphones or notebooks, they deliver higher margin however the downside is that retailers need a great deal of retail floor space to range white goods such as refrigerators washing machines and air-conditioners. This is why JB Hi Fi was looking to expand their JB Hi Fi HOME offering into larger format stores.
Now with the acquisition of The Good Guys JB Hi Fi can deliver scale inside existing The Good Guys stores.
I suspect that JB Hi Fi management has already worked out that they can get better utilisation of floor space in stores owned by The Good Guys.
One thing was crystal clear during the negotiation period and that was that JB Hi Fi management were prepared to walk away from this deal and compete head-on in their own rights up against Harvey Norman in an effort to grow their share of the appliance market.
JB Hi-Fi shareholders support the strategy behind the deal but had been worried about Murray paying too much.
JB Hi-Fi is funding the deal through a $394 million entitlement offer, with the rest coming from new and existing debt facilities.
The Good Guys, which is privately owned by Melbourne’s Muir family, has unofficially been up for sale for around five years.
No-one has bought it earlier because of the company’s business model was not conducive to easy sale due to the fact that many of their stores were independently owned.
The big challenge for potential buyers was conducting due diligence on a company with multiple different owners.
The Good Guys has a network of 100 stores, of which many were jointly owned by individuals or the Muir family.
The Muir family are relatively low-profile although they have a number of philanthropic interests.
Andrew Muir was ranked 123rd on last year’s BRW Rich List with a fortune of $453 million. His late father Ian Muir built The Good Guys franchise from a single shop in Melbourne’s Essendon in 1952.
Muir is the biggest shareholder and jointly owns the company with his mother and sister.
An acquisition of The Good Guys is expected to boost JB Hi-Fi’s sales from $3.9 billion to almost $6 billion, add $110 million to earnings before interest, tax, depreciation and amortisation – before synergies estimated to be worth as much as $40 million. Yakima member printed up