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(Alliance News) - Frasers Group PLC's move to buy into AO World PLC and white goods was not a surprise, as it was the next logical step following forays into beauty and furniture.
The Shirebrook, England-based owner of the House of Fraser, Sports Direct and Flannels retail chains bought a 19% stake in AO World with the purchase of 109.4 million shares at a price of 68 pence each. This totalled an investment of GBP75 million.
AO World shares were up 4.4% at 72.61 pence each on Monday morning in London. Frasers shares were up 0.7% at 689.50p.
Frasers said the investment was the "culmination of productive talks over the last two years about establishing a strategic partnership".
AJ Bell analyst Russ Mould commented: "In recent years it has aspired to get more money from its customer base and a natural extension has been to focus on things that make people look and feel good beyond simply the clothes on their back. That explains its push into beauty, handbags and sofas through such brands as Flannels, House of Fraser and Sofa(.com). If it has dressed people and partially furnished their homes, it makes sense to think about other ways to get these customers to part with more cash.
"It has become fashionable to have sports equipment at home, whether that be exercise bikes, weights or rowing machines. These are incredibly bulky to get to people's homes, so there is merit in finding ways to make the delivery process more efficient for such items as well as existing homeware products it is selling – which is where AO's expertise might come in handy."
Frasers is also "one to spot a bargain", Mould added, and the company has previous when it comes to snapping up stakes in firms without mounting a takeover. It has built just under a 10% stake in Asos PLC.
AO World shares achieved a closing high of 433.40p in early-January 2021, but have struggled since.
Profit cautions, tumbling consumer confidence, inflationary pressures, a Germany exit and credit cover worries at suppliers meant post-pandemic life for the former FTSE 250 constituent got off to a difficult start.
Something had to change. AO turned to self-help measures. In its annual results back in August, it planned a "period of realignment for the business", focusing on cash a profit generation.
Since then, it has issued a number of guidance lifts, and market confidence in the stock is returning.
Shore Capital Markets called the Frasers deal a "vote of confidence" for AO World.
"AO is no longer a loss-making business relying on external finance to stay afloat. A retrenchment from Europe, rationalisation of its cost base and refocus on profit is positioning the firm to generate meaningful free cash flow," Shore analysts added.
Frasers said through the strategic pact, it will benefit from AO's expertise in "two-man delivery".
Shore added: "In other news, major UK logistic company, Tuffnells, prepares for administration and instructed its 2,300 employees to go home on Friday afternoon. The company has claimed to be an expert in handling large, bulky items and we therefore see AO and Marks Electrical as natural beneficiaries from perhaps lower delivery driver wage pressure."
By Eric Cunha, Alliance News news editor
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