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JD Sports shares were trading marginally down on their open today following news that the sports retailer was buying smaller rival Footasylum for 82.5p per share, effectively valuing Footasylum at GBP90 million. It was great news for Footasylum shareholders, who have seen Footasylum shares slide from 200p in June to a 46.5p closing price on Friday. This followed on from two profit warnings last year.

With shares in Footasylum almost doubling in value as a consequence of the acquisition, which JD Sports had previously vehemently denied it would make, investors in the smaller company will be congratulating themselves on a superb value play.

Will Footasylum deal be good for JD Sports shares?

But the bigger question now is what will this do to the value of JD Sports? At the time of writing the JD Sports stock was still holding its own, trading slightly down on its Monday open.

JD Sports is paying a 77% premium on Friday’s closing price, but this is still half of Footasylum’s IPO offer price when it was listed just 16 months ago.

“Footasylum went for a rapid growth but the wheels started to come off in May last year as a highly promotional market forced its margins down and choked the supply of cash needed to build out its store network,” observes Patrick O’Brien, UK retail research director at GlobalData. “The resulting profit warnings and dialing down of capital investment plans devastated its market capitalisation.”

JD Sports share price forecast

For JD Sports, this looks like a defensive move against Mike Ashley’s Sports Direct, says O’Brien. With Footasylum’s share price so low, it looked like only a matter of time before the so-called “hoover of the high street” would strike. JD Sports began building a stake last month, obviously in an effort to head an Ashley swoop off.

O’Brien thinks the deal looks like a positive one for JD Sports, as it has the clout to restart Footasylum’s expansion and use its sourcing and scale to make it more efficient. “We expect it to develop what is still a very marketable fascia,” he said.

Further reading on The Armchair Trader:

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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