The Adairs Ltd (ASX: ADH) share price is rising, up 9%, after announcing the acquisition of Focus on Furniture for $80 million.
Adairs is a leading homewares and furnishings retailer with a large store network, a membership program and an online offering.
Adairs to buy Focus on Furniture
The acquisition price is $80 million on an enterprise value (EV) debt free basis.
Adairs said the price equates to 2.4 times the actual FY21 EBIT (EBIT explained), which was $32.8 million.
What is Focus on Furniture?
It’s described as a vertically integrated omni-channel furniture retailer in Australia. It has 23 stores and a small, but growing, online channel.
This business is described as strongly profitable with growth opportunities from a national store roll out, online growth and expansion of its categories and ranges.
The strategic reasons for the acquisition
Adairs said that Focus on Furniture is operating in similar areas as Adairs’ existing businesses.
There’s a complementary customer product overlap with opportunities to leverage Adairs’ strengths in areas like product development and last mile delivery.
This acquisition will also increase the group’s exposure to the bulky furniture category, which is a market with over $8 billion.
Focus will continue to operate independently from Adairs, with its existing management team continuing under new contracts.
Management see strong growth opportunities that have the potential to drive sales of more than $250 million over the next five years.
Funding, balance sheet and dividend
Adairs will be funding this with $74 million of debt and $6 million of new shares to the continuing Focus CEO, Rob Santalucia.
The increased debt remain “comfortably” within the company’s existing covenants with the leverage ratio not expected to exceed 1.2x.
Adairs reassured shareholders that there is no change to the Adairs dividend payout policy, which is 65% to 80% of net profit after tax.
Summary thoughts on this deal and the Adairs share price
This seems like a smart acquisition by Adairs, it really fits in, and expands its exposure to furniture. It adds to earnings and diversifies the profit as well.
I was already a fan of Adairs as an investment idea, with its plan to open more large stores as well as growing online sales. Focus is another exciting growth avenue for Adairs.
I’d happily buy a parcel of shares today. I think it’s one the compelling ASX dividend shares.
