20
J Sainsbury Plc. Acquiring Dixon Retail Plc. BAM 521-Corportae Finance Benoy Joseph Kingston Business School Kingston University
J Sainsbury Plc. Acquiring Dixon Retail Plc. BAM 521-Corportae Finance Benoy Joseph Kingston Business School Kingston University
1
Table of Contents 1. Executive Summary:...................................................................................................................... 2
2. Evaluation of Target and Bidder Firm .......................................................................................... 3
2.1. Bidder Company: J Sainsbury Plc. ........................................................................................... 3
2.1.1. Sainsbury’s Financial Position ............................................................................................. 3
2.1.2. Sainsbury Business Strategy .................................................................................................. 5
2.2. Target Company: Dixon Retail Plc. .......................................................................................... 5
2.2.1. Dixon Retail Plc.’s Financial Position .................................................................................. 6
2.2.2. Dixon Retail Plc. Strategy ..................................................................................................... 7
3. Opportunities for Synergy ............................................................................................................. 8
3.1. J Sainsbury’s rationales for Dixon Retail Plc. Acquisition ....................................................... 8
3.1.1. Synergies in Economies of Scale ......................................................................................... 10
3.1.2. Synergies in Earning Potential............................................................................................ 10
3.1.3. Synergies in Infrastructure/ Technological ......................................................................... 10
3.1.4. Synergies in Expansion (Exploring and exploiting) ............................................................ 11
4. Valuation of Dixon Retail Plc. Share price ................................................................................. 11
4.1. Sensitivity Analysis .................................................................................................................. 13
4.1.1. Sales Growth Rate ............................................................................................................... 14
4.1.2. Operating Profit Margin ..................................................................................................... 14
4.1.3. Incremental Fixed Capital Investment ................................................................................ 14
4.1.4. Incremental Working Capital Investment ............................................................................ 14
4.1.5. WACC ................................................................................................................................. 15
4.2. Value created with Synergy and Bid Price .............................................................................. 15
4.3. Bidding Price .......................................................................................................................... 17
5. Riposte to the bid of Dixon retail plc. ......................................................................................... 17
6. REFERENCES ............................................................................................................................ 19
2
1. Executive Summary:
As of 13March 2012, J Sainsbury (SBRY.L) one of the largest Brick and Mortar Retailer in
UK announced its offer to acquire Dixon Retail Group(DXNS.L) for a share price of 23.68p
60% up from the current share price of 14.80 as of 13March’2012. If the bid is accepted
Dixon retail Plc. will be paid £5.34bnwith a premium of £3.2bn.
Dixon Retail Plc. has ~32% of the Electronic goods market share and brands like Currys, PC
world, Dixons, The link etc.
The rationale of this acquisition is based on the integration of two giants in retailing with
diversified products, however sharing almost the same strategy and competitive advantage.
This acquisition is also a strategic move by J Sainsbury to acquire a Electronic retail giant at
the minimal price as the market has devalued Dixon Retail Plc, with a high beta of 2.02.
On the other hand, J Sainsbury to stay in competition it has to diversify from its core business
or expand into international territory. From J Sainsbury’s perspective international expansion
is highly risky and may take longer in order to find returns from its investment.
For Dixon Retail Plc. which is not performing well financially, with inconsistent profit
margins and unstable growth, the synergies created by this acquisition can not only help bring
value to its current business, but will also help it to explore and exploit.
Further to this Bid, Dixon Retail Plc. will have to decide if it has to agree to the substantial
bid made by J Sainsbury or reject the offer.
3
2. Evaluation of Target and Bidder Firm
2.1. Bidder Company: J Sainsbury Plc.
J Sainsbury plc. Traded in LSE as LSE: SBRY is the third largest chain of super markets in
the United Kingdom with a market share of 16.5 % (Source: Reuters) of the UK supermarket
sector. J Sainsbury has consistently shown strong financial performance year on year with
2011 revenues £22,943m (source: J Sainsbury annual reports).
J Sainsbury plc. was founded in 1869 and today operates a total of 934 stores with
557 supermarkets and 377 convenience stores. It jointly owns Sainsbury’s Bank with Lloyds
Banking Group and has two property joint ventures with Land Securities Group PLC and The
British Land Company PLC. (Sainsbury: annual reports)
2.1.1. Sainsbury’s Financial Position
Figure 1: Sainsbury Revenue
4
Figure 2: Sainsbury EBITDA
Table 1: Sainsbury’s Financials for the year 2011
FINANCIAL YEAR 2011
GROSS MARGIN 5.44%
NET PROFIT MARGIN 2.73%
OPERATING PROFIT MARGIN
RETURN ON ASSESTS 5.16%
RETURN ON EQUITY 11.13%
RETURN ON INVESTMENT
Source: FT.com J Sainsbury annual report 2011.
Sainsbury has shown strong performance in the highly competitive retail industry in
the UK with continual growth in revenues and EBITDA as shown in Fig 1&2. The revenue
grew from 19.96bn to 21.10bn in 2011 showing a 5.7% sales growth. This significant
growth is due to Sainsbury ability to provide its products at competitive price to its customers
by concentrating on lean operation by cutting down its operation cost.
Sainsbury also increase the dividend pay-out by 6.34%, which is well above the industry
average and quite uncommon in the retail industry.
5
The competitive nature of the UK retail sector has forced Sainsbury to diversify and start
looking for new venture in order to stay in business and ensure strong financial growth.
2.1.2. Sainsbury Business Strategy
J Sainsbury focusses on five core competencies to bring value to its customers:
1. Great food at fair prices,
2. Accelerating the growth of complementary non-food ranges and services,
3. Reaching more customers through additional channels. For e.g. Online sales, click
and collect,
4. Growing supermarket space,
5. Active property management.
Hence the focus always remains on reducing the price of every product they sell and
reach strong economies of scale.J Sainsbury also believes in diversifying their product range,
this can be seen with it launching Sainsbury bank, partnership with Lloyds TSB, which
resulted in a pre-tax operating profit of up over 50%.
2.2. Target Company: Dixon Retail Plc.
Dixon Retail Plc. is Europe’s largest specialist electrical retailer and services
company, operating in 26 countries, with over 1,200 stores in around 13 countries, across
Europe employing over 38,000 people. Dixon Retail Plc. is the number one market leaders in
the UK & Ireland, Nordics, Greece and the Czech Republic. Dixon Retail Plc. has a long
established chain of brands under its wings like Curry’s, PC world, Dixon Travels,
Knowhow, DSGI business, Part master within UK and Ireland. Dixon Retail Plc. does also
have a strong presence in e-commerce with Pixmania.com and Dixons.co.uk. Figure 3
below is the description with regards to the financial contribution of each brand:
6
Figure 3: Financial contribution of each brand
2.2.1. Dixon Retail Plc.’s Financial Position
The financial performance of Dixon Retail Plc. has not been very impressive, but
given the current economic downturn the company has shown significant resilience. Dixon
Retail Plc. has shown flat sales revenue, however net income fell from 59.80m profits in
2010 to 239.00mn loss in 2011. This is due to a significant increase in selling, general and
administrative cost from 5.48% to 7.88% as a percentage of sales.
Figure 4: Dixon Retail Plc. Revenue
7
Figure 5: Dixon Retail Plc. EBITDA
Table 2: Dixon Retail Plc.’s Financials for the year 2011
FINANCIAL YEAR 2011
GROSS MARGIN -
NET PROFIT MARGIN -2.84%
OPERATING PROFIT MARGIN -1.92%
RETURN ON ASSESTS -6.32%
RETURN ON EQUITY -31.00%
RETURN ON INVESTMENT -13.36%
2.2.2. Dixon Retail Plc. Strategy
Dixon Retail Plc. believes in multi-channel approach to electrical retailing and provides
its customers with comprehensive range of after sales services. Since May 2008, Dixon Retail
Plc. has formulated a 5 point strategic plan for renewal and transformation (R&T) of the
group.
1. Focus on the customer.
2. Focus the portfolio on winning positions.
3. Transform the business
4. Reduce cost base
5. Win on the internet.
8
The R&T plan remains at the heart of the of Dixon Retail Plc‘s strategy and will show
progress in the coming years. But a demoralising financial performance as mentioned earlier
created a huge dent in the future operations for the company. However the company has risen
to the occasion and had a quick review of its strategy and closed down a few of its loss
making business in Spain and focus on high return on capital and increase cash from
operations. Dixon’s focus now will be on the following:
Upping the service: Delivering better value, choice and service to customers.
Strengthening the multi-channel offer: Concentrate more on after sales service, as
this is the differentiator from the other online retailers.
Best practice across business and borders: Knowledge sharing and best practise
sharing initiatives are given high regard.
Source: Dixon Retail Plc. Annual Reports
3. Opportunities for Synergy
This section of the report talks about the synergy created for J Sainsbury Plc. with
the acquisition of Dixon Retail Plc. And the strategic fit of both the companies in order to
benefit from this acquisition.
3.1. J Sainsbury’s rationales for Dixon Retail Plc. Acquisition
J Sainsbury is currently operating in a very saturated retail market and for the
company to continue growing it has to diversify or expand. Expansion in terms of stores and
geography is highly risky for e.g. Tesco struggling in its operation in Japan and US. Hence J
Sainsbury has to strategically diversify from its core business, look out for opportunities’
which will empower the company when the market recovers. Sustainability/Survival is
another key issue in front of J Sainsbury. Sainsbury core business is still food and drink
retailing, wherein its competitors such as Tesco and M&S have wide product range offering
furniture, electronics and clothing etc.
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Sainsbury acquiring Dixon Retail Plc. will help them diversify from their traditional
operation of Food and Drink retailer to a retail brand that offers wide range of consumer
electronics as well. This in turn will help the organisation to compete with their immediate
competitors like Tesco and M&S giving them a strong market share.
Figure 6: Market Share
Dixon Plc. market dominance will further help it to increase its market share, together
with Sainsbury. The advantage of the size can help Dixon in the following ways:
Buying advantage,
Volume advantage,
Access to new products,
Advertising Scale,
Access to retail property,
Source:<<http://tutor2u.net/business/marketing/market_analysis_marketshare_importance.a
sp>>[Accesed on 13Mar’2012]
Keeping in mind the above facts, J Sainsbury can bring in value to Dixon retail Plc.
As mentioned before, Dixon Plc. is struggling to keep its operations cost lower, however the
financial performance of the company has made it evident that they have failed drastically.
On the other hand Sainsbury’s competitive advantage is making sure that the
operational cost is well maintained and operations margin is consistent. This will be one of
the key synergy that Sainsbury can transfer to Dixon’s business and make it profitable. Dixon
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retail is also struggling with diminishing cash flow, which is curtailing its day to day
operations. A cash rich retailer like Sainsbury can pump in cash to a large extent and still
maintain its operations in high standard.
3.1.1. Synergies in Economies of Scale
J Sainsbury’s current market share is currently at 16% in the conventional retail
market and Dixon’s retail has ~32.4% accumulative of all it brands in electrical retailing
(Gaurdian.co.uk). This shows the potential this acquisition can bring for Sainsbury. This will
lead to a cost reduction per unit of commodity sold by improving the purchasing power of the
group, reducing surplus facilities, reduction of marketing overheads and other distribution
overheads.
3.1.2. Synergies in Earning Potential
With the huge market share in both conventional retailing and Electronic retailing,
this acquisition can lead to a direct threat to the existing players in the market. With the new
trend in retailers trying to deliver everything under one roof, this acquisition can be the most
cost effective approach by Sainsbury to diversify and gain market share. With the above
mentioned market share, if both the group are able to sustain 4-5% OPM can lead to huge
earnings for both the companies.
3.1.3. Synergies in Infrastructure/ Technological
This acquisition can benefit both the groups from sharing the best practices, Sainsbury can
bring in the lean operations expertise in order to reduce the operational cost for Dixon plc.,
and in return Dixon can share the expertise in e-commerce which will lead to Sainsbury
gaining online market share and can avoid the threat of players like amazon and Tesco
creating market dominance.
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3.1.4. Synergies in Expansion (Exploring and exploiting)
With this acquisition the group will have the potential to maneuverer and find new
potential markets for e.g. International expansion, expansion online, Product and Process
development etc. and also give flexibility in their balance sheet with surplus cash to explore
and exploit the market conditions.
4. Valuation of Dixon Retail Plc. Share price
As on 13Mar’2012 market close, Dixon Plc. share price was at 14.80p (London Stock
Exchange)
Figure 7: Market snopshot
12
Figure 8: DCF Valuation pre-bid
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13
Dixon retail Plc. was highly impacted by the economic slowdown and hence there
financials were highly unstable. Last 5 years average is taken in order to derive at a future
forecast of the company’s financial performance, I.e. sales growth, OPM% etc. The market
still in the recovery stage, the assumption is that Dixon plc. Will be having negative sales
growth and no profit margin in Y1-Y3, however with the market recovering in the future the
sales growth will improve and is expected to deliver 8% on terminal value.
The above assumptions have helped in deriving at the current share price of Dixon
Plc. which is at 14.80p as of 13-03-2012.
Table 3: WACC Calculation source
WACC Calculation Source
Equity/Market Cap http://uk.reuters.com/
Long Term Debt Dixon Plc. Annual Report
Cost of Borrowing Interest/Debt Dixon Plc. annual report
Risk Free Rate Yield of 10 year UK Bond
Equity Premium
Beta http://uk.reuters.com/
4.1. Sensitivity Analysis
Figure 8: Sensitivity Analysis
Sensitivity analysis*
Impact
SGR 47.0%
OPM -60.8%
CTR -32.7%
IFCI -15.2%
IWCI -40.6%
WACC 21.1%
14
4.1.1. Sales Growth Rate
According to the DCF model, the forecast of sales growth is very positive, as a
terminal value of 8% SGR is showing a positive 47% impact on the sensitivity analysis. This
means that the company will be responsive to its strategies for long term sales growth and the
share price can fluctuate moderately with change in the SGR.
4.1.2. Operating Profit Margin
OPM is highly affected by the company’s operation as the sensitive analysis shows
negative 60.8% with a 2% terminal OPM value and this will impact the share price
drastically. The nature of the industry where Dixon Retail operates is highly competitive and
can get impacted by recessionary forces in the market. Dixon’s failure in maintaining its
operations cost in the past years shows that the OPM is highly sensitive to the long term
strategy of Dixon Electric, and it is possible that Dixon Electric may run with Negative Profit
margin.
4.1.3. Incremental Fixed Capital Investment
With 4% terminal value on IFCI, the sensitivity analysis shows that the company will
show a negative 15.2% growth in terms of their growth and expansion in terms of investment
in fixed assets. It is clear that Dixon electric will have to cut down on expansion.
4.1.4. Incremental Working Capital Investment
The nature of the retail business, demand a huge working capital and hence the
terminal value is kept at 15%, however this is still giving a negative impact of 40.6% on the
sensitivity in share price. Dixon can really struggle in managing their day to day operations
with low cash and inefficient stock management.
15
4.1.5. WACC
WACC is hugely impacted with high beta of 2.02; this has shown direct impact on
the share price as well as the share price is deteriorating. One of the reasons is the financial
instability of Dixon Retail Plc. as it is making losses consistently.
Considering the above results, this will be the right time for J Sainsbury to buy Dixon
Retail Plc. as the share price of Dixon Retail Plc. is at the lowest at 14.20p as of 13-03-2012.
4.2. Value created with Synergy and Bid Price
A conservative approach is used to calculate the value created with synergies for J
Sainsbury and Dixon Retail Plc. acquisition. Sales growth rate and Operating profit margin
are expected to be 7.5% and 2% respectively at terminal value, considering the volatile nature
of the Retail industry and the direct impact it has due to recession and other economic
reasons.
J Sainsbury is assuming a share price of 33.9p with synergies that will value Dixon
Retail plc. at £122.4bn, however as mentioned earlier it is a very conservative approach as
the value of synergies can be much higher considering the market share Dixon Retail plc. has
under its wings.Fig.9 Below is the evaluation of Dixon Retail Plc. share price with synergies.
16
Figure 9: DCF Valuation post-bid
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Key v
alu
ati
on
assu
mp
tio
ns:
1.
SG
R in
Y1-Y
3 w
ill b
e n
eg
ative
du
e t
o e
con
om
ic s
low
dow
n,
bu
t w
ill im
pro
ve a
nd
be c
on
sis
ten
t d
eliv
erin
g ~
8%
gro
wth
.
2.
OP
M is e
xpecte
d t
o g
row
, a c
on
serv
ative
fig
ure
of
2%
is a
ssu
med
in
th
e T
erm
inal va
lue
3.
IFC
I is
assu
med
at
20%
, as p
ost
acq
uis
itio
n t
he f
ocu
s w
ill b
e o
n e
xpan
sio
n
4.
IWC
I is
assu
med
at
30%
in
ord
er
to e
nsu
re a
mp
le w
ork
ing
cap
ital fo
r d
ay t
o o
pera
tion
s
5.
WA
CC
of
7.9
0%
is h
igh
ly d
ue t
o D
ixon
's B
eta
bein
g v
ery
hig
h c
om
pare
d t
o t
he in
du
str
y
17
4.3. Bidding Price
Share price of Dixon Retail Plc as of 13-03-2012 was at 14.80p. J Sainsbury should
consider the fact that this can be one of the best opportunities for it to acquire the group as the
company is highly undervalued because of its financial instability.
Keeping the above facts in mind, J Sainsbury will be bidding the Dixon Retail Plc.
(Target) at a 60% premium with a share price of 23.68p. This bid price is a strategic move
in order to ensure that Dixon Retail Plc. is in no position to reject the offer. Therefore the
premium paid by J Sainsbury to the shareholders of Dixon retail in value will be £3.2bn.
J Sainsbury’s bid might look very optimistic however there is possibility that the offer
can be rejected by shareholders, nevertheless J Sainsbury will keep in mind that they remain
flexible and offer a premium anywhere between 60%-80% of the current share price of
Dixon Retail Plc. i.e.14.80p.
5. Riposte to the bid of Dixon retail plc.
The offer of Sainsbury to acquire Dixon Retail Plc at a share price 23.68p, with a
premium of £32bn to Dixon shareholders the probability of bid being rejected is very
unlikely. Dixon Retail Plc. will be left with the question that if they can bring this value to
their shareholders if the acquisition doesn’t take place. With the current level of operation
and financial instability Dixon Retail will have seldom reasons to believe that. However,
given the market share of Dixon retail Plc. it will be looking at the possible synergies it can
attain together with J Sainsbury and create value for its shareholders.
Cash rich J Sainsbury, with an exceptional turnaround time of it inventory and its
process expertise in retailing will be of great value to Dixon Retail Plc., as they are struggling
to get their operations cost lower and maintain enough working capital for their day to day
operations.
The high cost of capital of Dixon Retail Plc. due to high beta of 2.2, and its impairment to
raise further cash can be resolved by this acquisition as J Sainsbury is financially very strong
and can be used as an instrument for further capital investment for the growth of Dixon Retail
Plc.
18
This acquisition will make the group emerge as a leader in all the aspects of retailing,
and will bring value in terms of bargaining power with their suppliers and buyers. And will
also have high potential in order to create barriers to entry for new players like Amazon.com
etc.
This acquisition will also be a great learning opportunity for both the firm, in terms of
culture and organisational values. Both the companies share very common values of giving
the best to its customers, with highly reasonable price.
4.1 Success or Failure of the Bid:
The success of the bid will be determined with the assumptions made in the
acquisition coming true and create value to the group. If the following synergies, Economies
of scale, earning potential, Infrastructure and technology and synergies in expansion work as
assumed in the DCF model this acquisition will be regarded as a high success and will create
high value to the shareholders.
Failures on the other hand will be if Dixon Retail Plc. resists the learning and growth
opportunity that it can gain from the acquisition and J Sainsbury trying to impose its
organisational culture over Dixon Retail which will create an imbalance and may lead to
disputes within the organisation and can lead to potential failure of the acquisition.
4.2 Value Conception to Shareholder:
The market will show a positive response to the acquisition, as J Sainsbury’s shareholders
have high confidence in the potential this acquisition can bring to them. The market share of
these two firms together will create a monopoly for J Sainsbury in the UK retail sector. The
positive sentiment of the market will show an immediate increase in J Sainsbury’s share price
and with all the probabilities considered the shareholders will welcome J Sainsbury’s
decision to acquire Dixon retail plc.
19
6. REFERENCES
Brealey, R., Myers, S. And Allen, F. (2010) Principles of Corporate Finance, 10th edition, McGraw-
Hill.
Damodaran Online: Acquisition Valuation.[Online] Available at:
<<http://pages.stern.nyu.edu/~adamodar/>> (Accessed on 13Mar’2012)
Dixon Retail Plc. Annual Reports (2011) Available at:
<www.dixonsretail.com/dixons/.../11-07-07_DixonsAnnualReport>(Accesed on 13Mar’2012)
Dixon retail Plc. market share[Online]: Available at:
http://tutor2u.net/ (Accessed on 13Mar’2012)
J Sainsbury Annual Report (2011) Available at:
<www.j-sainsbury.co.uk/ar11/>>(Accesed on 13Mar’2012)
Reuters (2011) ‘Financial Highlights Dixon Retail Plc’, Reuters [Online].Available at:
http://www.reuters.com/finance/stocks/financialHighlights (Accessed: 13Mar’2012).
