JD Sports, the sportswear retailer, has taken a 10 per cent stake in JJB Sports, just in time for a deal that could potentially wipe out its beleaguered rival's debts.
JD spent about £8.1m on buying just over 25 million shares in Wigan-based JJB on Monday, according to a statement released to the market yesterday. JJB subsequently announced that it is holding talks over the sale of its Fitness Clubs business, having received an approach from an unnamed bidder for the chain of 50 gyms.
That bidder is understood to be Dave Whelan, the chairman of Wigan Athletic Football Club, who was the original founder of JJB in 1977. Mr Whelan, who sold his 29 per cent stake in the group to chief executive Chris Ronnie last year, is now in negotiations to buy the gyms for about £100m, which would be enough to pay off its debts.
Philip Dorgan, from Panmure Gordon, said that a deal with Mr Whelan would wipe out company debt and remove financing concerns. The company has to pay back a £20m three-month bridge loan it took out in September with Kaupthing. The move was made to fund the purchase of Christmas stock, but if it is a disappointing year, the group could come under severe pressure. "There are parallels with Next in the early 1990s when the sale of Grattan rescued the company," Mr Dorgan said, adding that David Jones, then chief executive of Next, is now deputy chairman of JJB.
The two announcements helped lift JJB shares by as much as 7 per cent yesterday, though there was some surprise about JD's purchase and scepticism about the health clubs' deal.
This is JD's first investment in its high street rival. It said: "JD has made this strategic investment in JJB because of its important place in the performance sports retail market," but would not offer any further comment.
Some analysts were baffled by the move to pay so much for a non-yielding stock, with one saying "what's so strategic about taking this stake?" JD had already approached JJB over buying its Qube and Original Shoe Company businesses in October. It is understood that the negotiations are ongoing.
JD, formerly The John David Group, bucked the trend for high street returns when it posted a 54 per cent rise in half year pre-tax profits in September. This contrasts with a terrible year for JJB, which admitted in September that it risked breaching its banking covenants. The subsequent collapse in confidence saw the shares slump 70 per cent.Reuse content