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The latest instalment of “Death of a Stock Market” reached investors’ screens over the weekend as news broke that buyout group Elliott is preparing a bid for Currys.
The UK electrical retailer confirmed it had rejected a 62p-a-share approach that valued its equity at just shy of £700mn. This familiar plot of a struggling and unloved UK company grew thicker when Chinese ecommerce giant JD.com confirmed its interest on Monday. Currys’ long-suffering investors may finally get some relief.
There is little uniquely British about the malaise at Currys. Retailers globally were already under intense pressure before the pandemic’s arrival in 2020 and things haven’t improved. Before the bid Currys’ shares were trading at levels last seen during the depths of the financial crisis.
European peers such as Ceconomy and Fnac Darty trade at similarly low valuations. But Currys’ lack of large influential shareholders makes it a better choice for a buyer looking to capitalise on the sector’s long-running story of self-help.
The pandemic added new problems for retailers already struggling with online competition and unsustainable property rents. The former has not gone away but bricks-and-mortar retailers have fought back against growing online sales by upping their in-store offerings.
Rents have also adjusted as retailers trim space. Currys’ boss Alex Baldock decided to axe more than 500 Carphone Warehouse locations at the start of 2020. The number of Currys stores is heading for half what it was when Baldock launched a turnaround in 2019, with fewer than 800 expected by the end of this year.
That may leave little in the way of fat to trim for Elliott or JD.com. But consumer wariness means the benefits are emerging only slowly. Currys upped its pre-tax profits expectations in January to £115mn for the year ending in April. That is still only a third of 2019 levels.
Supply chain disruptions have added new problems. Retailers are carrying more stock than they once did. Currys’ inventory is a third higher than in 2019. That working capital drag on cash flow means shareholders can only look forward to a reinstated dividend equal to one-tenth of 2019’s levels next year, according to Visible Alpha consensus.
Currys’ board is right to push back against bidders taking advantage of depressed earnings. Consider that an economic recovery might get net profits to £100mn in four years’ time, worth about 80p per share at the bid multiple. Still, pushing for much more for this battered outfit would risk ruining shareholders’ happy ending.
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