JD is logical winner of odd UK retail bidding war

Hot Currys. Unfashionable Currys is suddenly at the centre of a bidding war. Over the weekend the British electronics retailer said it had rejected a 700 million pound approach from U.S. investment giant Elliott Advisors, only for China’s $37 billion JD.com to say on Monday it was mulling a cash offer of its own. The feeding frenzy over what is a shrinking business in slow-growth Europe is weird, but JD’s need for overseas expansion isn’t.

On first sight, Currys is not an obvious object for anyone’s obsession. Its business of selling phones, TVs, laptops and washing machines faces fierce competition. Operating profit margins were less than 1% in the six months to end-October, and half of the group’s revenue comes from the UK, which has fallen into a recession. Currys’ top line, partly because of dismal sales in Nordic countries like Sweden, has shrunk for two consecutive years since 2021.

Elliott’s cash offer of 62 pence a share looks opportunistic: while a 32% premium over Currys’ last trading price on Friday, the shares have lost 70% of their value since a previous peak in 2021. And there’s some basis to say things are improving: the company has been working on cutting costs and trimming debt, while showing an ability to grab higher margins through services such as mobile phone repair and consumer credit. The subscription bits of its UK business alone could be worth over 1 billion pounds, Investec reckons, if Currys can hike its customers from their current 1.6 million to 2.5 million.

Either way, JD desperately needs to expand overseas. A flurry of Beijing crackdowns on monopolistic behaviour has darkened retailers’ domestic growth prospects, but these are especially acute for JD. A weak Chinese economy has forced the group to offer discounts, further depressing margins in its core areas of focus like electronics sales. Unlike PDD’s Temu, TikTok Shop, and H&M rival Shein, which have made international forays in Europe but also in the Middle East and Africa, JD’s foreign jaunts haven’t got very far: it recently announced it had exited e-commerce ventures in Indonesia and Thailand.

For 2024, Currys is forecast to make around 200 million pounds of operating profit, LSEG-compiled estimates suggest, or around 150 million pounds after tax. Even at Elliott’s 700 million pound equity offer it’s hard to attain a return above Currys’ 11% cost of capital if you include 1 billion pounds of lease liabilities as debt. But given how much the Chinese group needs to diversify, and its $11 billion of net cash as of September, JD may not be averse to paying a fair bit more anyway.