FOOT.L Share News (FOOT)

(Sharecast News) - JD Sports could be made to sell Footasylum after the Competition and Markets Authority said on Tuesday that the takeover "substantially" lessens competition.
The competition watchdog said the ?90m takeover of Footasylum by JD Sports, announced last year, could lead to shoppers seeing fewer discounts, for example from clearance sales and Black Friday promotions, or receiving a lower quality of customer service. It could also result in less choice in stores and online, it said.

"While JD Sports is the largest retailer in this market with around 375 stores nationally and Footasylum is smaller, the CMA's detailed investigation has provisionally found that they compete closely, and surveyed customers indicated that there are only a small number of other retailers that they would consider buying from," the watchdog said.

The CMA is now asking for views on its provisional findings by 3 March and possible remedies by 25 February. Although it will assess all evidence before making a final decision, its current view is that blocking the deal by requiring JD Sports to sell the Footasylum business may be the only way to address its competition concerns.

Peter Cowgill, executive chairman of JD Sports, said the CMA's provisional decision was "fundamentally flawed" and demonstrates a "complete misunderstanding" of the market.

"The competitive landscape described by the CMA is one which neither I, nor any experienced sector analyst, would recognise. Just take a walk down any major UK high street or search for Nike or Adidas trainers on Google and you can see for yourself how competitive this marketplace really is.

"The CMA's provisional findings do not reflect the objective evidence, with excessive weight being placed on surveys asking hypothetical questions of a small sample of selected customers equivalent to less than 25% of the footfall of one JD store in Manchester for one week, rather than assessing the reality of how consumers actually shop on a national scale."

JD Sports said Footasylum is expected to contribute less than 2% of group earnings in the year to January 2020 which, after a "robust" post-Christmas sales period in its key overseas markets, are now expected to be at least equal to the top end of current market expectations. After adjusting for IFRS 16, these range from ?403m to ?434m.

At 0930 GMT, the shares were up 2.7% at 868.80p.

Shore Capital analysts Greg Lawless and Clive Black said: "In our view, this is a punchy statement from JD Sports against the CMA's provisional findings. We have seen in the last year or so the CMA eviscerate the Sainsbury Asda merger on competition grounds, probably quite rightly. In recent months we have seen the CMA launch a Phase 2 investigation into Amazon acquiring a minority stake in Deliveroo and now this latest decision on the wider sports retail market.

"In our view, this deal isn't anti-competitive and to suggest otherwise highlights that the CMA hasn't fully understood the wider global sports retail market."

Neil Wilson, chief market analyst at Markets.com, said Sports Direct's Mike Ashley "will be cock-a-hoop as the CMA has essentially backed up his view that it will lessen competition among key must-have brands like Nike and Adidas".

"With Footasylum having less than 5% market share you would have to question whether the CMA has got this right. However it's not about the overall market share but the top brands' footprint. The CMA seems to have listened to Ashley on this. JD Sports and Footasylum dominate in so-called 'must-haves' which gives them a powerful position in the market that just a simple market share metric doesn't quite explain."

House broker Peel Hunt said the CMA's view that the combination risks reducing competition online and in stores is "puzzling" and "pays no attention to a number of competitive issues, for example the increasing strength of the big brands' direct-to-consumer operations.

"There doesn't seem to be many remedies being proposed by the CMA to rescue the deal: a sale of the business seems the only route open to JD at this stage. Conversations will continue, but the ink is drying fast on the block. We struggle to see how FA is going to prosper post sale. Of course the obvious bidder for the stores if Frasers Group, but there would appear to be as many competitive issues as there were with JD."



Peel Hunt noted that it received "barely any" calls about the JD Sports FA deal on the day and that it has "barely ever" been mentioned in meetings since.

"It is a small issue and the upgrade to consensus is far more fundamental," it said.