Related to financial and operational analysis.
In a presentation to investors, JB Hi-Fi (JB) has outlined key risks associated with its acquisition of The Good Guys (TGG).
Firstly, there is risk that information provided by TGG was incomplete, inaccurate or unreliable and there is no assurance that the due diligence was conclusive or identified all material issues in relation to TGG business.
It is also possible that the financial, operational, business and/or other analysis undertaken by JB in relation to TGG or the acquisition, as well as its best estimates and forecasts, are inaccurate or not realised in due course.
Secondly, actual synergies as part of the acquisition may be less than expected or delayed, or they may not materialise at all. JB’s future profitability and prospects could be adversely affected if integration of TGG business is not completed efficiently and effectively, with minimal disruption.
The future growth of TGG business will depend, in part, on securing appropriate properties for new stores. Therefore, if appropriate properties cannot be secured then there is a risk that TGG will underperform the future expected growth.
Thirdly, there is a risk that potential liabilities assumed by JB were not identified as part of the due diligence review in relation to the acquisition, or the scope of potential liabilities were not fully accounted for. If JB assumes these new or additional liabilities, and such liabilities materialise, it may have an adverse impact on the combined group’s financial position and performance and/or JB’s share price.
The warranty and indemnity insurance policy obtained by JB is subject to exclusions and limitations on liability. Accordingly, there is a risk that JB will not be able to fully recover losses arising from a breach of warranty or make claims under the relevant indemnity.
Another risk relates to the new structure of TGG. Prior to July 1 2016, TGG’ store network was comprised of 45 wholly owned stores and a further 55 stores owned in joint venture structures with JVPs responsible for operating and managing these stores. On July 1, TGG moved to a model under which all stores are wholly owned. Some of the JVPs elected to leave the business, other JVPs have elected to stay on as store manager employees by accepting a 12 month fixed term management agreement which expires on 30 June 2017. Therefore, the following may occur:
- The business is impacted by unforeseen disruption
- TGG is not able to indentify and hire sufficient high quality and experienced store managers to replace outgoing JVPs
- The JVPs who have elected to stay on may not be sufficiently incentivised under their management agreements, which may cause a decline in earnings performance