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M&A Deals

Mike Ashley’s Frasers Group acquires DW Sports for £37m

Mike Ashley’s Frasers Group has recently acquired DW (Dave Whelan) Sports after the company collapsed into administration earlier this month after the lockdown completely wiped out its income. Frasers have paid £37m for 46 fitness clubs and 31 retail outlets, having only purchased certain parts of the business, not buying the brand name or any intellectual property. The value of the transaction may rise by up to £6.9m depending on the number of associated lease holdings that Frasers Acquires. 

Frasers Group 

Founded: 1982

Sector: Consumer Cyclical

CEO: Mike Ashley

Type: Public

Annual revenue: £3.7bn  

DW Sports

Founded: 2009

Sector: Retail and fitness clubs

CEO: Martin Long

Type: Private

Annual revenue: £139.4m 

Deal overview

DW Sports was forced to close its 73 gyms and 75 sports stores due to the pandemic, leaving the company with high fixed costs and zero income as stores remained shut and membership subscriptions were put on hold. But the firm could not hold on for as long as they needed to and were forced into administration at the beginning of August, appointing BDO as its administrator. After fighting off competition from the Whelan family (the family of the current owner David Whelan) and JD Sports, Frasers Group is to pay an initial cash consideration of £37m. The overall deal excludes the DW Business names and intellectual property, but the final price may still rise depending on how many of the property lease holdings they choose to acquire. 

Deal rationale 

Ashley cannot resist a bargain

Frasers group has a reputation for snapping up distressed firms, with Ashley having begun his acquiring spree in the late 1990s, buying Donnay in 1996 and Lillywhites in 2002 — easy pickings as both were facing financial difficulties at the time. The company has said it intended to run the gym and fitness business using its Everlast brand, the American boxing kit manufacturer made famous by Muhammed Ali, which Frasers acquired in 2007 for $168m. “The transaction complements the existing gym and fitness club portfolio within the company’s group and is consistent with the group’s elevation strategy,” Frasers Group said. Retail experts have told the Retail Gazette that it appears Ashley was “cherry-picking” what he saw as the best parts of the business, and getting them for a relative bargain-basement price. With DW Sports’ Companies House accounts showing it had assets worth £194m, Frasers Group seems to have gotten a bargain. Ashley’s main goal is just to rebrand the retail outlets of DW Sports as Sports Direct, acquiring it at a knockdown price without any intention of transforming DW.

Knocking out a rival

Ashley and Whelan have had a long rivalry, spanning more than two decades, with Whelan telling Ashley, “There is a club in the North, son, and you’re not part of it”. The Sports Direct owner then retaliated by exposing the scam to fix the price of football shirts, which led to multi-million-pound fines from the Office of Fair Trading to those involved, including Whelan’s JJB Sports. As well as getting some revenge on a personal grudge, the deal allows Ashley to get rid of one of Sports Direct’s biggest competitors, and at the same time beat another rival, JD Sports, in getting the acquisition. 

Success is not guaranteed

However, it is quite a bold move from Frasers Group to acquire this amount of gyms in a time where people are lacking the confidence to go back into public spaces. Not all of the gyms acquired have reopened; it does not feel like the most obvious move to buy facilities that are still closed. Also, Ashley is venturing out from what he knows, with it not being his typical move to buy into the gym market as opposed to the retail market as usual. It may be more difficult to find synergies between the gym and retail experience, which is what normally gives the rationale for a potential acquisition. 

Frasers themselves have not been performing as they would want, with underlying pre-tax profits for the group falling by 18% to £117.4m in the year up until April 26th. Sales at its core sports business decreased 14.6%, but increased 0.7% including the contribution from the digital gaming group Game, which is now part of that division. Total group revenues increased from £3.7bn to £3.9bn after a number of acquisitions including Game, Sofa.com, and Jack Wills, so a new acquisition may seem like a sensible idea. 

But there is speculation as to whether Ashley can transform DW as past acquisitions have not gone to plan. He vowed to turn House of Fraser into the “Harrods of the high street” after buying the company for £90m. However, in its full report last year, Frasers Group labelled House of Fraser’s problem as “nothing short of terminal in nature”. Currently, it seems there is no intention to “transform” DW Sports, but just rebranding any stores as Sports Direct and gyms as Everlast, so a lack of confidence in Ashley’s ability to transform may not be of any worry.

Only time will tell

It may be a while until the public is confident enough to bound back to the gym in greater numbers. It will not be clear if the acquisition was the right move from Ashley until then and if the risk of acquiring gyms during a pandemic will pay off. If anyone has enough experience to pull this off it is Mike Ashley, having made his fortune from acquiring distressed companies, so the fate of DW Sports is hopefully in good hands.

Sources:

https://en.wikipedia.org/wiki/DW_Sports_Fitness#cite_note-2

https://en.wikipedia.org/wiki/Frasers_Group

https://www.ft.com/content/c328dd8c-6377-4ffb-a764-de4ae157b6d0

https://www.theguardian.com/business/2020/aug/24/mike-ashleys-frasers-group-buys-fitness-chain-dw-sports

https://www.retailgazette.co.uk/blog/2020/08/can-mike-ashleys-frasers-group-turn-dw-sports-around/

https://www.cityam.com/mike-ashleys-frasers-group-bids-for-dw-sports/

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