Financing Strategies Utilized By JD Sports In Mergers And Acquisition Activities

Financing Options Available

The purpose of this report is to analyze and discuss about financing strategies utilized by JD Sports in acquiring a number of companies in a series of mergers and acquisition activities. The report would analyze the various sources of funding available to corporates along with the merits and demerits associated with the sources. The report also analyzes the efficiency of the financing model employed by the company for acquisition to assess its impact on the long-term solvency of the company. The concluding portion of the report explores the financial bid made by the company to acquire Footasylum and the reasons behind Competition and Markets Authority not formally confirming the bid.

Capital infusions are frequently required by corporations to satisfy commitments and grow into new business sectors, and they may be obtained from a variety of sources. The two primary sources of funding are raising capital by issuing equity and issuing debt securities.

Debt financing is a type of capital raising that involves a corporation selling debt instruments to the market. Bonds, bills, and notes are examples of debt instruments that an investor can purchase and earn semi-annual or annual interest payments. A bond is a financial instrument where the lender issues funds for a longer period of time and receives interest income at regular intervals with the principal being returned at the maturity of the bond (Yazdanfar and Öhman 2015).

Advantages:

• The lenders do not have any right on the process of running the business and has no ownership of the company.
• Once the loan is paid, the lender does not have any relationship with the company.
• The interest paid on debt securities are tax deductible reducing the impact of taxes on profits.
• The interest expense can easily be assessed and can assist in prediction of future financial performance models.

Disadvantages:

• Interest expense is a monthly expense which the company has to incur. Bond holders often puts forward multiple covenants which restricts the company from involving into certain activities (Zhang 2016).
• Debt finance is simpler to acquire while the economy is doing well, but it is more difficult to obtain during times of economic turbulence, when businesses require the greatest funding.

It is the process of obtaining funds by selling firm shares to the general public. Family, friends, and other investors are all possible sources of equity finance (Feng, Wang and Huang 2015). The procedure through which a company seeking money issues stocks and collects funds from investors is known as an initial public offering (IPO).

Advantages:

• Equity capital does not need to be returned back even if the business goes bankrupt. Investors being partial owner of the company share the losses along with the company.
• There is no operating cash outflow as equity capital does not require any interest payment.
• There is no minimum time frame within which the equity capital needs to be returned hence it gives the company flexibility to use the capital in long-term strategies (Li et al 2017).

Disadvantages:

• Raising equity capital necessitates the firm transferring a portion of its ownership in the form of shares. If the nature of the firm is hazardous, the investor's share will be higher.
• Investors play an active role in the management of the company's affairs and participate in corporate decision-making.

JD Sports fashion PLC in the first quarter of 2018 announced to have entered into a 100% merger agreement with Finish Line PLC which is an athletic retailer in the US, for a deal value of $558 million (Annual report 2018). The deal was accomplished at a premium of 28 percent to the prevailing market value of Finish Line PLC. For financing the acquisition, the company used a combination of debt financing facility. Out of $558 million required to accomplish the acquisition, the company proposed to leverage the balance sheet of Finish Line to raise funds equal to $150 million via a new asset-based lending (ABL) facility of $315 million provided by PNC Bank. The existing revolving credit facility of Finish line $125 million was to be terminated after the accomplishment of the acquisition proposal. The remaining balance of $408 million which is required for the acquisition was financed by a new revolving credit facility (Investis.com 2018). The ABL lending was to be secured against the assets of Finish Line and its subsidiaries where as the charges related to interest and capital for the overall funding was to be paid out from operations of Finish Line Plc in the US without any recourse to JD’s Business in the UK eliminating any chances of bankruptcy in future.

Debt Financing

 Shoe Palace was a shoe retailer run by a family until it was acquired by JD Sports Fashion on December 16^th, 2020. The acquisition was to be completed at a valuation of $325 million for 100 percent shares of Shoe Palace and the members’ interest in Nice Kicks LLC (Pitchbook 2020). The company deferred $100 million out of the total value of $325 million to be paid at later dates within the 12 months and the remaining amount of the consideration was paid out of the cash generated by JD Sports and other banking facilities which were at disposal for the company. The owners of the Shoe Palace were also given 20 percent of shares of the new subsidiary worth $356 million in addition to the consideration of $325 million. Shoe palace's owners were also given exit options in the form of puts and calls that would expire on February 1st, 2025. Because the transaction was entirely funded with cash and other equity-related facilities, the danger of bankruptcy is minimal because no debt was issued for the purpose (Investis.com 2020). Alternatively, as part of the arrangement, the corporation had to give over 20% of its subsidiary to the proprietors of Shoe Palace (Rozario 2020).

The company further expanded in the US by acquiring DTLR Villa LLC for $495 million on March 18^th, 2021, two months after it acquired Shoe Palace (SGB Media 2021). The deal to acquire DTLR Villa LLC was agreed at a consideration of $495 million out of which $100 million was to be used to retire the existing debt of DTLR. The acquisition was financed using the cash resources available to the company and other bank facilities that were available to the company. Similar to the deal of Shoe Palace, calls and put options were agree upon for the management of DTLR Villa LLC as an exit strategy (Annual report 2021). Because the acquisition did not require the firm to issue debt or raise stock, there were no financial risks associated with the transaction, and there was also no chance of bankruptcy

On March 19^th, 2019, JD Sports announced that it was going to acquire fashion chain brand Footasylum which had an offering of casual and sports footwear along with several famous brands, for a consideration of approximately EUR 90.1 million which was around $119.54 million (Retail insight 2019). The deal was agreed at purchasing the existing shares of the company at 82.5p per share in cash which was to be financed using the cash at hand and other banking facilities available with the company. The primary motivation behind the acquisition for JD Sports was to achieve strategic and operational benefits which was to be experienced by both companies. The company had already acquired 18.7 percent of the shares in Footasylum last month (BBC 2022).

Equity Financing

On May 17^th 2019, the Competition and Markets Authority (CMA) initiated and Initial Enforcement Order which was for the purpose of preventing pre-emptive actions related to mergers and acquisition laws. JD Sports was prohibited from integrating Footasylum with them until the investigation initiated by CMA was completed. The deal was blocked and put under investigating putting an order issued by the CMA that prohibited the company to share financially sensitive information with Footasylum before acquiring prior permissions from the CMA. The order also required the company to install strong measures which would prove to be beneficial in preventing such breaches in future.

The CEO’s of the companies were found to be exchanging commercially sensitive information with each other with promptly alerting the CMA about them in a series of meetings that took place on 5^th July 2021 and 4^th August 2021. The CMA also accused the CEO’s to have deleted records of the meeting to avoid any regulatory actions. The deal was later blocked by the regulator in November 2021 citing unsuitability of the merger as the end of competition between the companies could have been detrimental in the perspective of the consumers (Gov.uk.com 2022). The merger between two major footwear retailers in the country and the sharing of commercially sensitive information could have affected the competition in the market resulting in anti-competitive behavior which became the primary reason of blocking the deal from taking place. On February 14^th 2022, the company was fined of EUR 5 million for breaching merger rules and regulations in the country (Guardian 2022).        

Conclusion

The purpose of the analysis was to determine the benefits and drawbacks of various sources of finance accessible to businesses. The advantages of equity and debt funding for businesses were discussed, as well as the drawbacks of both. JD Sports' finance tactics for purchasing three big enterprises in the United States to increase their reach in the company were also discussed and investigated in the study. JD Sports used loan financing to complete the Fashion line transaction, while the other two acquisitions were funded using internally produced cash and other banking facilities. The company's finance approach had a minimal risk of bankruptcy since it did not rely on external loans to fund its operations. The research concludes by looking into the company's financial proposal for Footasylum and the reasons for the acquisition failing to go through and being banned by the Competition and Markets Authority.  

References

Acquisition of Shoe Palace in United States (2020). Available at: https://otp.tools.investis.com/clients/uk/jdsports3/rns/regulatory-story.aspx?cid=222&newsid=1436252&culture=en-GB&val=637552348207162011

Annual report. 2018. Reports & Presentations. [online] Available at: <https://www.jdplc.com/investor-relations/reports-presentations> [Accessed 23 March 2022].

Annual report. 2019. Reports & Presentations. [online] Available at: <https://www.jdplc.com/investor-relations/reports-presentations> [Accessed 23 March 2022].

Annual report. 2021. Reports & Presentations. [online] Available at: <https://www.jdplc.com/investor-relations/reports-presentations> [Accessed 23 March 2022] (Accessed: 23 March 2022).

Feng, Z.Y., Wang, M.L. and Huang, H.W., 2015. Equity financing and social responsibility: further international evidence. The international journal of accounting, 50(3), pp.247-280.

JD Sports agrees to buy Footasylum for £90.1m (2019). Available at: https://www.retail-insight-network.com/news/jd-sports-buy-footasylum/ (Accessed: 23 March 2022).

JD Sports and Footasylum fined £4.7m for competition breach (2022). Available at: https://www.bbc.com/news/business-60373402 (Accessed: 23 March 2022).

JD Sports and Footasylum fined almost £5m for breaching CMA order (2022). Available at: https://www.theguardian.com/business/2022/feb/14/jd-sports-and-footasylum-fined-almost-5m-for-breaching-cma-order (Accessed: 23 March 2022).

Li, L., Liu, Q., Tang, D. and Xiong, J., 2017. Media reporting, carbon information disclosure, and the cost of equity financing: evidence from China. Environmental Science and Pollution Research, 24(10), pp.9447-9459.

Proposed Acquisition of The Finish Line, Inc. (2018). Available at: https://otp.tools.investis.com/generic/regulatory-story.aspx?cid=222&newsid=992753 (Accessed: 23 March 2022).

Rozario, K. (2022) JD Sports Extends Sneakers Footfold With $325 Million Swoop On Shoe Palace, Forbes. Available at: https://www.forbes.com/sites/kevinrozario/2020/12/16/jd-sports-expands-sneaker-market-footfold-with-325-million-swoop-on-shoe-palace/?sh=dc2d1ac27d36 (Accessed: 23 March 2022).

SGB Media. (2021) JD Sports Completes Acquisition Of DTLR | SGB Media Online, SGB Media Online | Active Lifestyle Market B2B Information. Available at: https://sgbonline.com/jd-sports-completion-acquisition-of-dtlr/ (Accessed: 23 March 2022).

Sports retailers fined almost £5m for breaching CMA order (2022). Available at: https://www.gov.uk/government/news/sports-retailers-fined-almost-5m-for-breaching-cma-order (Accessed: 23 March 2022).

UK's JD Sports agrees to buy Shoe Palace for $681M | PitchBook (2020). Available at: https://pitchbook.com/news/articles/uks-jd-sports-agrees-to-buy-shoe-palace-for-681m (Accessed: 23 March 2022).

Yazdanfar, D. and Öhman, P., 2015. Debt financing and firm performance: an empirical study based on Swedish data. The Journal of Risk Finance.

Zhang, S., 2016. Institutional arrangements and debt financing. Research in International Business and Finance, 36, pp.362-372.