JB-HIFI

Next Capital’s partners undertook one of the most successful recent management buy-ins (whilst at Macquarie MBI) in Australia at entertainment retailer JB Hi-Fi.

The expansion capital deal helped win the 2004 Australian Venture Capital Association Limited’s Best MBI Award after securing an internal rate of return of 87.4% and an exit price of $89 million, more than six times the entry price of $14.1 million.

The transaction demonstrates the partners’ expertise in adding value to investee companies and patience in waiting for the right conditions before exiting an investment.

A thorough analysis found JB Hi-Fi had achieved steady sales growth and good store economics in a healthy market.

Opportunities for further growth lay in expansion based on retail technologies and continued economic strength, while low brand recognition outside JB Hi-Fi’s home state of Victoria and online sales posed some risk.

The vendor’s management wanted to sell out of the retailer and the partners had put together a highly experienced buy-in team.

The new team implemented a number of measures to build value, including a new point of sale system, experimenting with new store formats and increasing the number of stores. Revenues and profits increased dramatically and the board initiated a parallel trade sale and float process in June 2002.

Directors decided an Initial Public Offering (IPO) offered the best price and a lower deal completion risk but put the process on hold due to soft equity markets in November 2002 and the Iraq war in March 2003.

The IPO went ahead after the market recovered in September 2003, by which time revenues had grown from $120 million to $450 million and profits from $5 million to $22 million.

The company’s share price has remained consistently well above the average IPO price, reflecting its strong growth, and the shares as at 28 February 2007 now trade over $7 against IPO price of $1.55 for retail investors.