Frasers (FRAS) has paid £75mn to acquire an 18.9 per cent stake in online electricals retailer AO World (AO.), with the retail giant potentially taking advantage of ailing hedge fund Odey Asset Management's fire sale post-close on Friday.
The Sports Direct owner bought 109.4mn AO World shares at 68p, a significant discount to the share price highs seen at the online retailer during the pandemic. AO World’s shares sat above 400p in early 2021 but have since cratered.
Frasers' chief executive Michael Murray said that the new "strategic partnership" would see the company "benefit from AO's valuable know-how in electricals and two-man delivery, helping us to drive growth in our bulk equipment and homeware ranges".
AO World, which has struggled with profitability due to supply chain issues and a weaker domestic appliances market, guided in its latest trading update in April for annual adjusted cash profits to come in at the top end of its forecast range of £37.5mn to £45mn. Full-year results are expected on 5 July.
Shore Capital analysts argued that Frasers’ move “marks a solid vote of confidence in AO’s pivot to profitability story”, with “a retrenchment from Europe, rationalisation of its cost base and refocus on profit... positioning the firm to generate meaningful free cash flow and a circa 10 per cent free cash flow compound annual growth rate”.
Shore does not see sales returning to the 2021-22 highs in the coming years, but sees greater profitability, with the Ebitda margin climbing from 3 per cent in 2021 to 5 per cent in the current financial year ending 31 March 2024.
Frasers' share purchase comes after Frasers increased its position in fast-fashion retailer Asos (ASC) twice last week to take its stake to 9.9 per cent, raising speculation that a takeover could be in Ashley’s sights. Frasers faces a battle for control with Danish billionaire Anders Povlsen, who owns over a fifth of the shares.
AO World's shares rose by 7 per cent in response to the purchase, while Frasers' shares were up by 1 per cent.
