The Good Guys weighs options as JB Hi-Fi circles

JB Hi-Fi, the fast-growing consumer electronics chain, is considering a $350 million to $400m rights issue to fund a prospective acquisition of appliances retailer The Good Guys.

If JB Hi-Fi succeeds in outbidding its rivals, the equity raise would be undertaken by Macquarie and would likely be executed at a narrow discount, given the recent rally in its shares following the stellar earnings unveiled at its annual results.

But just as the company’s financial strength increases, its hotly pursued quarry threatens to fall beyond its grasp as yield-hungry investors pledge strong support for an initial public offering of The Good Guys.

DataRoom understands that brokers to the mooted float, which is being explored at the same time as Bank of America Merrill Lynch oversees a potential trade sale, are confident of achieving a market capitalisation of $1.19bn.

That’s $200m above where many analysts argue JB Hi-Fi should hold its fire.

Citi recently argued the retailer need not pay more than $900m amid concerns that The Good Guys, which is controlled by the Muir family, will struggle to compete against two aggressive incumbents: Harvey Norman and JB Hi-Fi.

Others have pointed out that while the $1.2bn IPO figure looks like an offer the appliance retailer owners could not refuse, the strategy carries significant market risk, given that any stockmarket debut remains some months away.

A sharp correction in the meantime could throw the deal off course and radically reduce the valuation.

Finally, there is the spectre of Dick Smith’s spectacular demise. Though the company bears little resemblance to the private equity trimmed business that collapsed this year, a shift in market conditions could provoke last-minute jitters among investors.

While a sale to JB Hi-Fi might leave money on the table, it would create a business with formidable buying power and deliver synergies the public markets could not hope to match.