One sports chain down, one to go for billionaire Mike Ashley

LONDON BRIEFING:PETER COWGILL, chief executive of JD Sports Fashion, would be forgiven for feeling a little nervous right now. As rival JJB Sports heads into administration – putting 4,000 jobs at risk – he may well recall the combative words of retail billionaire Mike Ashley last year, when the boss of Sports Direct boasted to analysts: "I'll finish off JJB first and then I'll move on to JD."

JJB has indeed been finished off and Ashley’s Sports Direct is in pole position to cherry-pick the best of his rival’s stores. It is a sad end for a company that was once Britain’s biggest and most successful sports goods retailer, with a stock market valuation topping £1 billion. Its shares are now worthless and investors, which include the Bill and Melinda Gates Foundation, have seen their holdings wiped out.

The administrators are expected to be able to sell about half of JJB’s 180 stores but the other half face closure.

While Ashley, who also owns Newcastle United football club and whose personal wealth has been put at £1.7 billion, is favourite to pick up the best stores, he could face competition problems, and the administrators will be talking to other potential buyers. These are thought to include Ireland’s Stafford Group, the privately owned energy, shipping and property conglomerate that also owns Lifestyle Sports.

Dave Whelan, who founded JJB in 1971 after a broken leg put an end to his career as a professional footballer, has also indicated his interest in taking over “one or two” of the shops he used to own.

While Ashley made no secret of his ambition to run his rival into the ground, Whelan, now aged 75, blames bad management rather than Sports Direct for JJB’s demise.

Whelan quit the business because of ill health in 2007, selling his remaining family shareholding for £190 million, and, perhaps predictably, believes the rot set in then. Shockingly, he reckons that just 20 of JJB’s 180 stores are profitable.

Competition from the hugely successful Sports Direct was certainly a factor in JJB’s fate but management of the business has been appalling in recent years. Whelan must also share some responsibility, as he presided over the ambitious but ill-fated £42 million takeover of discount stores chain TJ Hughes in 2002.

Shareholders were fiercely critical of the deal and JJB sold the business just 18 months later. But the damage had been done and the deal marked the end of the City’s love affair with the group.

There are many other ignominious milestones on JJB’s journey from stock market darling to administration – in 2009, the group’s Qube and Original Shoe Company chains, bought a couple of years earlier, collapsed.

JJB was later fined £455,000 by the City watchdog, the Financial Services Authority, for failing to reveal the true cost of the deals – when it bought Qube, for example, it told shareholders the price was just £1 but failed to mention that debts of £6.5 million were included.

By 2009 the company was already teetering on the brink, but managed to avoid collapse via a CVA (Company Voluntary Arrangement) with its landlords, in the process shutting scores of underperforming stores. There was a second CVA in 2011, taking the number of store down to 180 against 400 at its peak.

Shareholders also stumped up £65 million extra capital, money which has now been lost, as has the £20 million invested in JJB by Dick’s Sporting Goods, the US sports retailer, just five months ago.

Even as the administrators were preparing to move in, another disaster emerged at JJB – just last week it became clear that the group had incorrectly charged VAT on some merchandise, including children’s replica football kit, over a period of several years. The error resulted in a £6 million bill from HM Revenue Customs.

With JJB out of the way, will Mike Ashley fulfil his boast and turn his attentions to JD Sports?

The management of Sports Direct’s remaining large rival is certainly better than JJB’s and Cowgill is at least sticking to the job in hand, having ruled out the acquisition of any JJB stores.

But JD Sports is not without its own problems – in January it bought the heavily loss-making Blacks Leisure out of administration and is in the process of turning the business round. At the same time, its own sports fashion brands have suffered a slowdown in sales.

Cowgill is predicting break-even for Blacks in the second half of the year and is hoping the rest of the business will trade through the current consumer spending slowdown. But if the group should falter, he can be sure Mike Ashley will be waiting in the wings to pick up the pieces.

Fiona Walsh writes for the Guardian newspaper in London