Frasers Group acquisition of a near-20% stake in electrical retailer AO.com this week wasn’t a move that many were expecting.
After all, the Mike Ashley-owned retail group is largely made up of fashion businesses. However, Ashley has had the electricals retailer in his sights for some time.
In fact, just last July the Sports Direct tycoon looked to get involved in Ao.com’s £40m fundraising call by either underwriting the deal or buying shares.
The firms said Frasers Group’s £75m investment was the “culmination of productive talks over the last two years about establishing a strategic partnership”.
But what exactly does Frasers Group want with AO?
Right place, right time
Frasers has a penchant for making well-timed acquisitions with owner Mike Ashley known to love a bargain.
The group most recently upped its stake in struggling fashion etailer Asos after the online retailer’s shares plummeted to a 12-month low.
With AO’s second largest shareholder Odey Asset Management’s founder Crispin Odey at the centre of a sexual misconduct claims, and his investors rapidly jumping ship, now appears a good time to pounce on his shares.
According to Peel Hunt analyst John Stevenson, the deal was “opportunistic” for Frasers following the “fallout this weekend” with Odey stepping down from his role on Friday and the business forced to freeze funds this week.
Similarly, Russ Mould at AJ Bell points out that Frasers “is always one to spot a bargain” noting that the retailer’s share price has fallen significantly from above 400p in 2021 to below 40p last summer after it fell to a full-year loss.
While the Sports Direct owner’s venture into the world of fridge freezers may seem odd at first, according to Mould, “there is some logic” behind it.
Indeed, Frasers Group chief executive, and Ashley’s son-in-law, Michael Murray told The FT last September that it was to be more selective in its acquisitions in future.
He said: “If it doesn’t fit into sport, premium or luxury or add value to our ecosystem or platform, then we won’t be buying it.”
It would appear that AO fits into the latter category of adding value to the Frasers ecosystem.
Founded in 2000 by John Roberts, AO is the biggest seller of large domestic appliances in the UK. However, it’s not just an electricals retailer.
The business also owns a recycling facility, a charitable foundation and – what seems particularly appealing to Frasers – its own logistics firm.
“What AO does extremely well is two-man deliveries, which are very expensive and very difficult to do profitably,” says Stevenson.
This expertise could prove extremely useful to Frasers, which in recent years has sought to diversify its portfolio, buying Sofa.com in February 2019, followed by online department store Studio Retail, which also sells electricals, in February 2022 and homewares retailer Amara in December 2022.
Murray explains: “Frasers will 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.”
However, Mould argues that spending £75m “on buying nearly a fifth of a business when it could talk to any number of delivery companies for help” is “odd”.
AO boss Roberts seems happy enough about his new shareholder labelling it as a “fantastic endorsement for our business”.
“We are delighted to welcome Michael and the wider Frasers team into the AO family and look forward to realising the significant potential that we see for this partnership.
“As we continue to build on our strategy of pivoting to profitable growth, it will be hugely exciting to have a range of compelling strategic opportunities to explore together.”
It’s unclear how exactly the retailer will benefit from its newest shareholder. Although AO ended its five-store concession trail with Tesco as it focused on profitable sales, it could once again take the step into the world of bricks-and-mortar again.
While electricals are a core part of John Lewis sales, it is an area that rival House of Fraser, part of the Frasers stable, is particularly weak in. Could Ao concessions in store change this?
There could also be other potential tie-ups with other parts of the Frasers business, such as Studio Retail.
So, what is Frasers grand plan?
Of course, Frasers Group and its owner Mike Ashley are highly acquisitive and in the past, with Debenhams, House of Frasers and Studio Retail to name but a few, the share buy has been a precursor to a takeover attempt.
Is this the case with AO? It seems unlikely, according to Stevenson.
“There’s not an obvious synergy between the two business. They obviously like the idea of taking an investment if they’re going to benefit from that going forward.
“It doesn’t feel like it’s a precursor to bid. When you look at the activity with Frasers have made with fashion labels then you can see a logic for a full acquisition at some point but with this one, it doesn’t feel likely,” he says.
Mould adds that the retail empire “has form for taking equity stakes” without “making full takeovers” like they have done with Mulberry and Hugo Boss.
For the time being, logistics nous and electricals expertise seem to be the long and short of their interest in the firm, however, never underestimate Mike Ashley’s appetite for a deal.