Currys – rejects takeover proposals from Elliott

Currys has rejected “multiple attempts” from Elliott Advisors (a US investment firm) to iron out a deal which would see it get taken over.

Prior proposals from Elliott were for the entire share capital of Currys, with offers as high as 67p per share. This represented a large premium to the closing price before the proposal was announced.

As a result, Elliott has confirmed that it will not make a formal offer to Currys.

The shares fell 10.9% following the announcement.

Our view

Currys’ shares took a dip on hearing that the US party involved in the potential takeover battle with a Chinese bidder has withdrawn. It came after Currys rejected an improved proposal of 67p per share (valuing the company at approximately £757 million), deeming it significantly undervaluing the business. The Chinese e-commerce company, JD.com, has until 18 March to either submit a formal bid or declare it’s also walking away.

All this comes as Currys' performance has been underwhelming in recent times. Across the peak Christmas trading period, sales continued to decline across all regions.

Consumers are simply struggling to justify discretionary spending on TVs, computers and gadgets amidst the current cost-of-living pressures. That's led to record credit adoption in the UK & Ireland, as consumers try to break down the payments for big-ticket items into more manageable chunks. Being able to offer this credit option opens the door to sales that would have otherwise been out of reach for many customers.

In the Nordics region, the second largest segment, the market remains extremely tough. Weaker TV sales are offsetting a better performance in domestic goods, which suggests customers remain very selective about their spending. A recovery here will be key to a shift in market sentiment and profitability.

Last we heard, market share slipped lower as Currys shifted its focus towards more profitable sales, rather than compromising on price to help offload inventory faster. While there are negatives to this, we're supportive of holding firm on this front and it's helped improve gross margins across the business.

Despite all the challenges, there are some bright spots.

The group's services channels have also been a beacon of light. Services typically have higher margins than goods sales, so can help to relieve some of the pressure of the group's falling revenues. Because of this strong services growth, full-year pre-tax profits are now expected to land in the £105-115mn range, still around £9mn down on the prior year.

And the sale of its Greek electronics retailer, Kotsovolos, should bring in around £156mn of net cash, and allow management to sharpen its focus on the remaining regions. The plan is to use some of the funds to pay down debt levels, strengthening the balance sheet. This brings with it the potential to return any surplus cash to shareholders in the form of a dividend. However, this is not guaranteed and we caution against any expectation of continued payments over the near-to-medium term, given the group's struggling performance and negative free cash flows.

The group’s valuation has soared in recent months on expectations that a formal bid will materialise. The impact of Elliott walking away highlights the volatility speculation can bring. We should be clear, there’s still no guarantee that any formal bids will come to pass. Aside from the takeover talk, consumer electronics will continue to be a challenging place to be as spending power remains under pressure. A great deal also hinges on a recovery in the Nordics, and until that happens, group performance is likely to be lacklustre.