JD Sports Fashion PLC (LSE:JD.) could become a target for a take-private deal, according to a note from Citi, which highlights how depressed valuations and favourable financial mechanics could make a buyout feasible and potentially lucrative.
The analysis follows news that US-based Dick’s Sporting Goods has made a $24 per share offer for rival Foot Locker, representing an 86% premium to its last closing price.
That deal values Foot Locker at around 5.9 times its forecast earnings before interest, tax, depreciation and amortisation (EBITDA) over the next 12 months, based on estimates from analyst Paul Lejuez.
In that context, Citi sees JD Sports, currently trading on a 12-month forward price-to-earnings multiple of just 7.3 times, well below its five-year average of 14.9, as a compelling candidate for a leveraged buyout.
The valuation gap, the bank suggests, could draw interest from private equity, particularly given JD's relatively clean balance sheet and cash generation.
The note points out that JD is already 52% owned by Pentland Group, its long-term controlling shareholder, which could help facilitate a transaction.
Citi calculates that if a private equity sponsor targeted a 25% annual return over four years, and assumed an exit at 5.4 times EV/EBITDA, the average of JD's three-year trading multiple and the multiple implied by the Foot Locker deal, the acquisition could be viable even at a 100% premium to JD’s current share price.
To finance such a deal, Citi estimates JD Sports could support debt equivalent to 4.0 times EBITDA, excluding lease liabilities under IFRS 16.
This level is consistent with typical private equity transactions. While the analysis is illustrative, it suggests the economics of a take-private bid are credible under reasonable assumptions.
With the shares still trading at a discount and sentiment on retail subdued, Citi believes JD is worth watching as a potential M&A candidate.
Its international footprint, particularly in Europe and North America, could make it attractive to financial sponsors or strategic buyers.
The shares were trading 1.2% higher a 92.44p.