Financial Analysis And Acquisition Plan Of JD Sports And J Barbour And Sons Limited

Analyse the latest published financial statements of both companies with a view to comparing and contrasting the operations of the two companies and, in the case of JD Sport, appropriate competitors.

Comment on the proportions of the equity and debt within JD Sport’s capital structure and make clear reference to the sources of information you have used for each component. Comment on the usefulness, relevance and any weaknesses of using the cost of capital figures you have chosen as a basis for the discount rate to be used in capital investment decisions for JD Sport – you should also consider risk.

JD Sports Fashion PLC

When a company take over the other company and clearly established that the operations and the business of buying comapny would be operated under the name of the company which has acquired it, than this process is called acquisition. Acquisition is a corporate process in which an organization bought a firm’s ownership stock to make a control over the firm and run the business of the company under the name of acquiring company. Usually, the acquiring company buys the assets and the stock of acquired company to make decisions about the company and its operations (Madhura, 2011). There are various reasons due to which the acquisition process is performed by the companies. The few reasons of acquisition are increased synergy, greater market share, economies of scale, cost reduction, new niche offering, diversification and expansion of market etc. (Williams et al, 2005).  

In the report, JD sports fashion plc is making a plan to buy J Barbour and sons limited, a British private company. This evaluates that JD sports fashion plc wants to diversify its product and expand the market and that is why it is planning to acquire J Barbour and Sons limited which is operating its business in British market. It would assist the company to run its business in British market as well. The report explains about the total purchase consideration which would be required by the company to pay J Barbour and Sons limited. And it also evaluates the impact of acquisition on the financial statement of JD sports and on the share price of JD sports.

JD sports fashion plc is mostly known as JD. It is a sports fashion company which retails the sports clothes and it is mainly based in Bury, England. It sells its products and clothes throughout the UK market. The company is listed on London stock exchange and the company is FTSE 2520 index’s constituent. The company has been founded in 1981 at Bury in England (JD sports, 2018). The main products of the company are clothing and sportswear accessories. The main mission and vision of the company is to offer the best quality clothing sportswear to its customers as well as diversify and expand the market at international level. The main competitor of the company is sports direct international plc.

J Barbour and Sons Limited:

J Barbour and sons limited is a luxury fashion brand which retails the fashion clothes and it is mainly based in South Shields, England. It manufactures and sells its products and clothes throughout the UK market (J Barbour, 2018). The company has been founded in 1894 at South Shield in England. The main products of the company are water proof outwears, ready to wear, shoes, leather goods and accessories for children, women and men. The company has not listed itself on any stock exchange and thus it is a private company. The study explains about the financial position and purchase consideration for the company.

J Barbour and Sons Limited

Financial analysis is process that identifies and evaluates the business, projects, investment opportunity, budgets and various other financial transactions of the company to determine the suitability, position and performance of an organization. Financial analysis is mainly used by the financial analyst, financial manager and the investors to evaluate that whether the organization is suitable, liquid, solvent or profitable (Weygandt, Kimmel and Kieso, 2009). The financial analysis of JD sports fashion, J Barbour and sons limited and the competitive company, sports international direct plc has been evaluated to determine the financial performance and evaluation of the company. Ratio analysis study has been conducted on all the three companies to determine the suitable, liquid, solvent or profitable position of the companies.

Firstly, profitability ratios have been calculated. Profitability ratios are kind of financial metrics which are used by an organization to assess the ability of a business to generate the earnings that are compared to the expenses and other cost of the company at a particular time period. Profitability ratios are of many types such as net margin and return on equity. Net margin ratio explains about the total net profit of the company in context with the total revenue (Kinsky, 2011). Through the analysis on the net margin of companies, it has been evaluated that the profit margin of J Barbour and sons are quite better than other companies though the profitability margin of JD sports is also better in concern of the industry.

Further, return on equity of the company has been calculated. Return on equity expresses about the total net profit of an organization in context with the total equity of the company. Through the analysis on the return on equity of companies, it has been evaluated that the profitability position of J Barbour and sons are quite better than other companies though the profitability margin of JD sports is also better in concern of the industry.

Description	Formula	J.D. Sports			J Barbour and Sons			Sports Direct International Plc
		2017	2016	2015	2017	2016	2015	2017	2016	2015
Profitability
Net margin	Net profit/revenues	7.76%	5.52%	3.55%	13.07%	9.74%	3.55%	7.14%	9.61%	8.52%
Return on equity	Net profit/equity	31.89%	25.11%	17.41%	21.73%	21.88%	17.41%	18.71%	20.15%	20.78%

Further, liquidity ratios have been calculated. Liquidity ratios are kind of financial metrics which are used by an organization to assess the ability of a business to pay the short term debt obligation of the company at a particular time period. Liquidity ratios are of many types such as current ratio and quick ratio. Current ratio explains about the current assets and current liabilities of the company (Kaplan and Atkinson, 2015). Through the analysis on the current ratio of companies, it has been evaluated that the liquidity position and shot term debt obligation of JD sports are quite better than other companies as the company is managing the minimum resources at its maximum.

Further, quick ratio the company has been calculated. Quick ratio expresses about the total quick assets and current liabilities of the company. Through the analysis on the quick ratio of companies, it has been evaluated that the liquidity position of JD sports are quite better and it is according to the industry ratio.

Further, capital structure ratios have been calculated. Capital structure ratios are kind of financial metrics which are used by an organization to assess the ability of a business to manage and measure the debt, equity and interest level of the company. Capital structure ratios are of many types such as debt equity ratio and interest time ratio (Deegan, 2013). Debt equity ratio explains about the debt and equity and the capital structure of the company. Through the analysis on the debt equity ratio of companies, it has been evaluated that the capitals structure position of sports direct international plc are quite better than other companies as the company is managing the optimal capital structure.

Financial Analysis of Both Companies

Further, interest times earned ratio of the company has been calculated. It expresses about the total interest and the cost of the company. Through the analysis on the interest times earned ratio of companies, it has been evaluated that the capital structure position and cost position of JD sports are quite better and it is according to the industry ratio (Higgins, 2012).

Lastly, market ratios have been calculated. Market ratios are kind of financial metrics which are used by an organization to assess the ability of a business to manage and enhances the market position. Market ratios are of many types such as earnings per share, price earnings ratio and book value per share (Garrison et al, 2010). EPS explains about the earnings of the investors in context with the total profit of company in the market. Through the analysis on the EPS ratio of companies, it has been evaluated that the market position of sports direct international plc are quite better than other companies as the company is offering the highest revenues to the stockholders.

Further, PE ratio and market value ratio of both the companies have been evaluated to analyse the performance of the companies. Through the analysis and the calculations, it has been identified that the performance of J D sports plc is quite better in the market and the investors are more attracted towards the J D sports plc.

Description	Formula	J.D. Sports			J Barbour and Sons			Sports Direct International Plc
		2017	2016	2015	2017	2016	2015	2017	2016	2015
Market Ratio
EPS	Total profits available to shareholders/No of equity share	4.44	5.23	4.65				4.38	5.37	7.40
P/E Ratio	EPS/MPS	0.96	1.02	0.834				0.50	0.59	1.89
Book to market	Shareholders equity/Market Capitalization	20.48	14.06	17.39				32.06	21.09	16.41

(Appendix)

The financial performance analysis of all the three companies explains that the financial position of J D sports plc is quite better in the industry as the position of J D sports is way better than sports direct international plc. Further, it has been found that the J Barbour and sons limited’s financial performance is also better and it explains that if the J D sports would acquire the comapny than huge profits would be generated by the company (Hillier, Grinblatt and Titman, 2011).

Cost of capital is the total required return which is quite necessary for a business to make a capital budgeting project, for instance building a new factory, purchasing a new equipment etc. Cost of capital is the combination of total cost of an organization to raise the funds such as cost of debt, cost of equity, cost of preference equity, cost of treasury funds etc. Damodaran, 2011)

In the case, cost of capital of J D fashion plc has been calculated to identify the total cost which is given by the company to its stakeholders against the funds. Firstly, the cost of equity of the company has been evaluated. It explains that the market return of the company is 12% whereas the risk free rate is 4.25%. On the other hand, the beta of the company is 1.89. It explains that the cost of equity of the company is 18.90% (FT, 2018).

Calculation of cost of equity (CAPM)
RF	4.25%
RM	12.00%
Beta	1.89
Required rate of return	18.90%

Description

Further, cost of debt of the company has been evaluated. Cost of debt explains the total cost which would be occurred in an organization against the total debt amount of the company (Horngren, 2009). The cost of debt calculation of the company explains that the interest rate of the company is 14%, tax rate of the UK market is 21% and thus the cost of debt of the company is 11.06%.

Calculation of cost of debt
Outstanding debt	32,996
interest rate	14.00%
Tax rate	21.0%
Kd	11.06%

Lastly, the cost of equity of the organization has been calculated and it has been found that the total cost of capital of the company is 12.36%.

Capital structure of J D sports fashion plc
	Price	Cost	Weight	WACC
Debt	32,996	11.06%	0.645855	0.071432
Equity	14,092	18.90%	0.275833	0.052126
	51,089	Cost of capital		12.36%

The above calculation briefs that the total discount rate of the company is 12.36% which means the discount amount and the new cost of capital of the comapny against the new funds would be calculated on the basis of 12.36%.

Purchase consideration is the total agreed amount which is given by the acquiring comapny to the acquired company against the exchange of shares and the ownership of the company (Hogarth and Makridakis, 2011). Purchase consideration could be in the form of cash or assets or shares. It should be agreed by both the companies. There are various ways to calculate the purchase consideration such as net assets method, net payment method, discounted cash flow method etc.

The purchase consideration of J Barbour and sons limited has been calculated on the basis of discounted cash flows. Discounted cash flow method explains that it is crucial for the values to evaluate the profit as well as the past cash flows of the company to identify the future profitability level of the company (Bierman, 2010). The discounted cash flow method has been analyzed by considering the last 5 year’s cash flow of the company. The average cash flow of the company from last 5 years is $ 5,39,95,420. On the other hand, the growth rate of cash flow of the company is 11.07%. It explains that the terminal cash flow of the company is 15,42,85,333 (Appendix).

On the basis of calculations, it has been calculated that the total purchase consideration of the firm is $ 1,53,36,93,097 out of which the debt position of the company is $ 18,72,03,390 (Brigham and Ehrhardt, 2013). Through the evaluation, it has been found that the purchase price per share of the company would be $ 1,346.49.

Present value of terminal cash flows
Terminal cash flows	15,42,85,333.05		1,02,66,86,628.16
Total value of Firm ($M)			1,53,36,93,097.86
Less: Value of Debt			18,72,03,390.00
Total value of Equity			1,34,64,89,707.86
No of Shares Outstanding			10,00,000.00
Per share value of value of equity			1,346.49

It explains that if J D fashion plc wants to acquire J Barbour and sons limited then company has to acquire 10,00,000 shares of the company at the rate $ 1,346.49. The evaluation on the purchase consideration of the company explains that the financial position and the performance of the company are quite strong (Bromwich and Bhimani, 2005).

Formula

Further, it has been evaluated that the comapny could raise the funds through debt and equity to acquire the J Barbour. The company could raise the 60% funds through debt and rest 40% funds could be acquired by the company on the basis of equity of the company as the cost of equity of the company is quite lower than the cost of debt of the company and further, the risk position of the company is also lower. Thus the company is suggested to enhance the fund through 60% debt and 40% equity.

The financial statement and position of JD sports has been evaluated further and it has been analyzed that how would the financial position of the company be affected if the J Barbour and sons would be acquired by the company. The calculation and the analysis expresses that the financial performance and financial position of J Barbour was quite string and if the J D acquire this company than the financial position and performance of the company would be stronger. The net profit level of the company would be enhanced as the company would be able to capture the new market and thus the market share and revenue of the company would be enhanced (Baker and Nofsinger, 2010). Further, it has been found that the total assets level of the company would also be higher and the company would have enough funds to invest into new projects or resources.

The evaluation and the analysis on financial statement explains that the profitability level, solvency level, efficiency level and the capital structure position of the organization would be strong after acquiring the company. The profitability level of the organization would be around 13% after the acquisition. Further, it has been found that the capital structure position of the company would also be better after raising more funds for the acquisition (Ackert and Deaves, 2009). The financial strength of the company would be better. On the other hand, the cash flow position of the company would also be better.

Further, the stock price of the company has been evaluated and it has been found that the current market share of the company is $ 1004.24 which explains about a better position of the company in the market.  The stock price and position of JD sports has been evaluated after acquisition and it has been analyzed that how would the stock price of the company be affected if the J Barbour and sons would be acquired by the company. The calculation and the analysis expresses that the J Barbour was quite strong limited was a private company though the market share and the position of the company were quite strong (Brewer, Garrison  and Noreen, 2005). And if the J D acquires this company than the stock price and performance of the company would be stronger. The MPS and EPS level of the company would be enhanced as the company would be able to capture the new market and thus the investors would be attracted towards the company (Companies house 2018).

The company would be able to meet the investor’s exceptions by offering them high dividend. Further, the corporate governance of the comapny would also be changed which makes it easier for the other people to invest into the organization (Brown, Beekes and Verhoeven, 2011). The risk level of the company would also be lower and eventually, the growth exceptions of the company would also be higher which makes it easier for the investors to invest into the company. It explains that the stock position of the company would be much better.  

Conclusion:

To conclude, the stock price and financial position of JD sports would be quite better after acquiring the J Barbour and sons limited. The calculation and the analysis expresses that the J Barbour is quite strong organization and though the market share and the position of the company of JD would also be better. And if the J D acquires this company than the stock price and performance of the company would be stronger.

The analysis explains that the company should acquire the J Barbour limited as it would also help the company to attract more investors and risk level of the company would also be lower. The risk level of the company would also be lower and eventually, the growth exceptions of the company would also be higher which makes it easier for the investors to invest into the company.

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