1st Aug 2022 10:38
(Alliance News) - It is arguable that JD Sports Fashion PLC would be a very different company if did not acquire Footasylum, a "costly mistake" which it finally looks set to exit after years of regulatory scrutiny.
JD Sports acquired the footwear retailer back in March 2019 for GBP90.1 million. It has now agreed to sell Footasylum for barely a third of that price.
The athleisure firm will sell the company to German private equity investor Aurelius Group for GBP37.5 million, it announced on Monday.
The original deal was the subject of investigations and orders related to the deal from the UK Competition & Markets Authority.
In November last year, the CMA ordered JD Sports to sell the footwear seller to address concerns about competition.
"Based on the bare facts alone, JD Sports acquisition of Footasylum has been a costly mistake. Forced to sell by the competition regulator, it has made a pretty staggering loss of nearly 60% on an investment made just three years ago," AJ Bell analyst Russ Mould commented.
As well as making a loss on the purchase price, JD Sports also booked a fine in relation to the deal. In February of this year, JD Sports and Footasylum were fined nearly GBP4.7 million for collective breaches of an interim order issued by CMA during an in-depth phase two merger investigation.
The CMA imposed an interim order in May 2021 to stop the companies from "further integration" and ensure they remained competitors during a probe of the tie-up.
The order required the CMA to be immediately notified if any information was exchanged.
The CMA said JD Sports and Footasylum had "severely deficient safeguards in place - so much so that they created an environment where information exchanges were almost inevitable".
The CMA alleged two meetings took place in July and August of 2021, where the two chief executive officers, Barry Brown of Footasylum and Cowgill, now former CEO of JD, exchanged commercially sensitive information - on topics such as contracts, planned store closures, stock issues and financial performance. The CMA said it was not notified.
The scandal cast a cloud over Cowgill. And while his former dual role of chair and CEO also soured shareholder sentiment towards JD on a governance level, the Footasylum saga could be seen as the beginning of the end for Cowgill.
He eventually left the company in May of this year.
Mould added: "The real costs run greater than just the financial. Events surrounding the doomed transaction contributed to the departure of its executive chairman Peter Cowgill, after a highly successful tenure, and damaged the company's reputation for good governance."
JD's governance concerns are a far cry from its sales success. It has been one of the most resilient UK retail outfits in the face of Covid-19 lockdowns.
JD Sports shares were 0.5% higher at 130.24 pence each in London on Monday morning.
Analysts at Swiss bank UBS said that while the share price response to the Footasylum sale may be muted, the resolution of the matter will be "taken positively".
With one CMA-related issue in the rearview, UBS noted another - which comes in the form of a price fixing investigation also involving Glasgow-based Rangers Football Club.
JD Sports, Rangers and LBJ Sports Apparel Ltd, which trades as Elite Sports, broke "competition law by fixing" prices for products branded by the Scottish football club from September 2018 "until at least" July 2019, the Competition & Markets Authority said in June.
The CMA said: "Provided they continue to cooperate with the investigation, each will receive a reduction on any financial penalties the CMA may decide to impose. Any business found to have infringed the prohibitions in the Competition Act 1998 can be fined up to 10% of its annual worldwide group turnover."
For its 2022 financial year, which ended in January, JD Sports reported revenue of GBP8.56 billion, up 39% on the year before.
By Eric Cunha; [email protected]
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