Home Retail owner Argos agrees higher price but supermarket may seek deadline extension for due diligence
Sainsbury’s is close to taking control of Home Retail Group after agreeing an increased price of £1.3bn for the owner of Argos.
The supermarket was locked in talks with Home Retail last night and must make a formal offer by 5pm on Tuesday. However, despite the agreement on price, Sainsbury’s could seek an extension to the deadline in order to complete due diligence.
Sainsbury’s had its first approach for Home Retail snubbed in November at a price believed to be about £1bn. But it returned to its target in the new year and is now close to a deal.
Investors are confident that an agreement has been reached between the two parties at a price of slightly more than 160p a share. This represents a sizeable premium for Home Retail shareholders, who saw the stock dive below 100p before news of Sainsbury’s interest, and is not too high to scare off investors in Sainsbury’s.
Shares in Home Retail rose nearly 12% to close at 152.9p, their highest level since last summer, on hopes a deal would be agreed.
Discussions stalled last week when Sainsbury’s initially came back with offers of about 150p a share. The Sainsbury’s management has promised its shareholders that it will not overpay for its bid target, no matter how keen it is to secure a deal.
But talks today have been more productive, as market watchers said the supermarket group had the firepower to pull off an agreement. “Obviously if Sainsbury’s really wants to do the deal, they’d be stupid not to press on for the sake of 10p or so,” said the retail analyst Nick Bubb.
One of the key hurdles for Sainsbury’s was to bring onside its largest shareholder, the Qatar Investment Authority (QIA). It has done this in the past few days by promising it will not overpay to secure the deal. The QIA has made it clear that it preferred not to have its 25% stake diluted nor be required to put too much more money into its investment. Sainsbury’s appears to have persuaded the QIA of the merits of the deal, which helps the UK group fend off further expansion by Amazon into the UK grocery market. The supermarket owner is keen to acquire the skills in deliveries and logistics that have been built up by Argos.
As many as 245 Argos shops could close if the merger goes through, however. Analysis by the property agent Harper Dennis Hobbs shows that 245 out of a total of about 800 Argos stores are within half a mile of a Sainsbury’s outlet. Many of these would be under threat, with adverse implications for some of the 30,000 employees currently employed by Argos.
The chief executive of Sainsbury’s, Mike Coupe, had a demanding job persuading sceptical investors of the merits of the deal but analysts and industry watchers have increasingly been won round.
Home Retail’s largest shareholders are Schroders, with 19%, and Toscafund, with 7.25%. Both are believed to support the merger.
Home Retail’s recent £340m sale of the DIY chain Homebase, to the Australian retail group Wesfarmers, made it easier for Sainsbury’s to purchase the retailer, given it had little interest in entering the hardware sector. News of the initial bid for Home Retail triggered immediate speculation that Sainsbury’s would attempt to spin off Homebase as soon as possible.
John Walden, Home Retail’s boss, insisted recently that Argos would be able to survive on its own, but the group’s ability to fend off a takeover was damaged by its profits warning after a tough christmas.
In a note published last month, Merriman said a deal with Sainsbury’s would mean Argos stores could move into spare space in its new owner’s supermarkets. But she added: “We have long argued that Home Retail faces significant structural challenges at Argos and that like-for-like sales growth is not ensured. We do not believe that an acquisition by Sainsbury’s would dramatically change this.”
Jamie Merriman, an analyst at the asset management firm Bernstein, has warned that a standalone Argos would struggle to lift sales at its established stores and faced increased costs from the implementation of the national living wage. The removal of Argos services from more than 100 Homebase stores under Wesfarmers’ ownership would also affect sales and profits.
[Source:- The Gurdian]