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MARKET COMMENT
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Carburton Street, London -- The £42m purchase of TJ Hughes (LSE: HGH) by JJB Sports (LSE: JJB) looks to be a disaster in the making. By moving into another retail area, JJB is committing the High Street's cardinal sin: diworseification. The High Street is intensely competitive at the best of times. Management running just one proven chain can concentrate on digging a deeper competitive moat than those with two or more to juggle. In short, the more brands and diversity a retail estate has, the more thinly management talent will be spread, and the more logistical and operational hiccups that will occur. Indeed, JJB should know all about logistical and operational hiccups. Their purchase of Sports Division in 1998 was dogged with integrational problems for well over a year. That said, the Sports Division acquisition was a quantum leap in distancing JJB from its competitors. Trouble is, with 435 stores dotted around the country, the company now looks to have the sportswear market largely sewn up. So it's not too surprising to see JJB move into other areas. But general discount retailing?! While JJB's other fledgling developments (gyms and Soccerdomes) have a loose connection with sportswear, there's little synergy to be found by selling vacuum cleaners, housewares, luggage and lingerie. JJB explains that TJ Hughes' focus on discount retailing matches its own delivery of "quality merchandise at affordable prices". JJB also says their expertise in EPOS, stock management and distribution should create benefits, too. But such reasoning to buy TJ Hughes could be given by any leading retailer. With prominent comments about scope for expansion at TJ Hughes, the deal certainly smacks of going for growth for growth's sake. Mitigating JJB's purchase is valuation. The 140p per share offer price puts TJ Hughes shares on a prospective price to earnings ratio of 12.7 and forward dividend yield of 3.6%. But it will be small consolation for JJB shareholders to know their company didn't pay too much for corporate trouble. JJB have scored an own goal, and the shares fell 26.5p (6.5%) to 383.5p this morning as investors quite rightly voted with their feet.