It’s long been true that Frasers (LON: FRAS) has been interested in AO World (LON: AO.). So much so that back a year there was talk that Frasers would buy into the AO World rights issue. Even try to underwrite it so as to be able to build a substantial stake. That wouldn’t have been all that bad an idea given the 50% climb in AO World’s share price since then. It wasn’t to be though, despite that attempt at gate-crashing.
However, Frasers (and Sports Direct before that) tends not to be interested simply in trading opportunities. Rather, it tends to use trading opportunities to build strategic positions. Another retail company in difficulties and Frasers (or further back, Sports Direct) will buy in with a substantial stake. In order, if things go really pear shaped, to be able to determine how things work out. This is how the Frasers takeover happened after all. There was a similar attempt at Debenhams although that failed – Debenhams went properly bust leaving Frasers with a £150 million hole. The tactic has worked often enough to be profitable, even if it isn’t in every instance.
Frasers buys into AO World
So, given this long-term interest it’s fascinating that Frasers has just taken a substantial – 19% – stake in AO World. They’ve long wanted to be there, now they are. The reason this hasn’t shown up in the AO World share price is that it wasn’t a series of market purchases. Rather, they picked up the stake in one fell swoop from Crispin Odey’s asset management company. Now, Odey has his own problems right now, like being fired from that hedge fund he founded. But given that this deal has been announced then we’ve got to assume that it has gone through.
The question does become though, well, what are Frasers trying to do here? Which requires a step back or two.
So, AO World sells household electricals online. Sort of, maybe, the Curry’s store on the internet. Which is fine, we all know retail is moving online and not requiring expensive high street retail space for bulky items sounds like a great idea. AO World though got caught up in all that lockdown stuff. Which perhaps needs a little explanation. We all know, knew, that internet retail was going to take a portion of bricks and mortar. Some things were going to work better than others, some would be better than others. The only way we’d find out is by trial and error.
Then came lockdown and a huge leap in online sales – obviously. We can see this at ONS, here. The thing is though, is that a step change in internet penetration? Or a surge that will fall back as with the tide to the original movement? As it turned out it was the second. But those companies that geared up for the step change ended up having to retreat at great cost. So too the corporate valuations that thought a decade’s worth of advance had been concentrated into the one year.
Well, OK. But as with many to most stock market price moves it’s possible to say that the changes were overdone in both directions. As Odey’s position in AO World has indeed risen that 50% since a year back.
Does Frasers want all of AO World?
The big question now becomes, well, what does Frasers want from AO World now? There’s much talk here of working together, informing each other, mutual support and so on. But there has to be at least a suspicion that Frasers would like to have all of AO World. As with their other “cooperations” with other retailers.
All of this arose, became public, after the close of the markets on Friday night. AO World’s US grey market quote stopped some time ago. So too there seems little action in the American markets for Frasers. So, whatever action we’re going to see will come Monday morning.
So, how can we tell what Frasers wants at AO World?
As Frasers has bought just the one block shareholding it doesn’t, in fact, have to declare its intentions. Buying in the market can lead to that requirement, the one block trade not so much. So, a good guide is going to be whether Frasers does in fact make an announcement. “We have no intention of making an offer for all of AO World” would be an indication. But then, to a lesser extent, so will be the absence of such a statement.
We know that Frasers is aggressively acquisitive – but how much? Enough to try to swallow AO World?
