JJB eyes Sports Direct with cash call

October 9, 2009

Why put cash into JJB Sports? Investors are apparently so keen to do so that the sports retailer expects to raise 100 million pounds — more than its market capitalisation of just over 80 million.

At first glance, it is hard to see why. Britain is in the grip of a deep recession and only a few months ago, JJB was flirting with administration. Its shares have fallen 90 percent in two years. If that wasn’t enough, the company is embroiled in price fixing probes by the OFT and the Serious Fraud Office.

Clearly, JJB has benefited from the effect of a buoyant stock market into which investors still seem keen to put cash. As a stock that has fallen a long way, JJB is more likely to rebound once doubts about its future are lifted.

But there’s more to it than that. Many investors are trying to pick those that will emerge strongest in their sectors. They are backing JJB because they see it as a potential winner.

Under executive chairman David Jones the group is positioning itself to sell high quality sports clothing and equipment — in contrast to Mike Ashley’s Sports Direct discount chain, the UK’s largest sports retailer.

But a bigger factor is that while the sportswear market remains quite fragmented, many smaller independents are finding it hard to raise cash. So even if people are buying fewer Manchester United strips overall, more of those who do are defaulting to the bigger retailers. So JJB should take market share.

If investors buy that argument, why back the number two over the number one?

Firstly, Sports Direct is out of favour with the City after a disastrous stock exchange debut in 2007. Sports Direct may find it tougher to find willing lenders.

There is also a specific reason why Sports Direct may be a relative loser. The SFO and OFT investigation into possible price fixing and fraud hangs over both JJB and Sports Direct, but as the whistleblower on alleged cartel activity, JJB gets immunity, leaving Sports Direct to take the rap.

All that makes JJB an obvious pick, but there’s no certainty it will come out ahead. Fresh capital will help it restock the shelves of its 253 stores, rebuild relationships with Nike and Adidas and refurbish its shops, and so emphasise the difference between it and Sports Direct or the pure sports fashion focus of JD Sports.

Investors who subscribe to a share issue will be banking on JJB proving it can become more than an also-ran.

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