European Retail Briefing - October 2015
Analyst Comment
 
Fnac and Darty
Fnac has tabled a bid worth £533m for Darty, which, if approved, would create France’s largest retail electronics group. The question is, who benefits?

The retail sector has certainly in the past seen bids that have made big profits for the advisors but have done the businesses involved no good at all. That’s not to say that all acquisitions are bad – far from it. But we are not convinced by this latest proposal from France.

The details
Fnac says that it "believes that the combination of Fnac and Darty constitutes a compelling strategic and financial opportunity for both groups by creating a leader in the French electronics, editorial and home appliances retail market".

The idea was not rejected out of hand by Darty. Perhaps as part of its duty to shareholders, Darty is bound to give any such offer serious consideration. After all, while the bid may represent only 16% of Darty’s sales, it is 40 times its after tax profits in 2014/15. 

Darty vs Fnac
So the question is, as ever, why? 

It is worth pointing out that Fnac is not much more profitable than Darty – its pre-tax margins are only 1.4% against 0.9% at Darty. Both are struggling in a very difficult marketplace. Both companies are covered in Mintel's report on Electrical Retailing – Europe, February 2015.

It is easy to see the argument for the advantages: increased scale especially in the brown goods and grey goods markets and particularly in the markets where the businesses overlap – France, Belgium and the Netherlands. 

Fnac is a retailer of cultural goods – books, music, DVDs and their associated hardware – brown and grey goods. It operates mainly in large city centre stores and online. Darty is a retailer of a broad range of electricals goods, mainly from large out-of-town superstores. Both have struggled in the internet era. Darty has pulled out of a number of countries since it demerged from Kingfisher. Fnac was recently floated off by Kering (formerly PPR) and its sales performance has also been weak. But it seems to us that Fnac’s product offer is more under threat than Darty’s and so Fnac needs this deal more than Darty does. 

Where next?
In the UK Currys is demonstrating how a store-based electricals retailer can fight back against online competition and it has joined up with Carphone Warehouse to position itself properly for online developments and the "Internet of Things". Darty has not done this yet and it is hard to see how a deal with Fnac would help much if that is the right strategy to follow. 

Fnac is heavily exposed to books, music and DVDs – markets which are especially vulnerable to online competition for two reasons – the growth in downloading/streaming and the ability of online retailers to offer a wide range to everyone wherever they happen to live. 

Looking forwards or back?
We feel that a Fnac Darty deal would be potentially looking back to retailing as it used to be and not looking forward at the way that retailing and the electricals market is going. There's no doubt that Fnac is a strong brand and the business has been one of the most successful of the post war era. But it is faced with severe challenges because of the way that the market is changing around it and it needs to adapt to that and react accordingly. 

We do not see how a merger with Darty will really help with Fnac’s underlying problems. Nor does it look to us as if a link with Fnac is the right way forward for Darty.