Sainsbury’s has reached an agreement with Home Retail, valuing the business at approximately £1.3bn. Here’s the City’s reaction.
“If successful this could be a brave and decisive move by Sainsbury’s – allowing the retailer to diversify its appeal, repurpose its store space and simplify its own offering.
“In the medium term this would create two retailers under one roof, one focusing on non-food and the other on groceries.
“However, there is a flip side to this. Argos has developed a strong multichannel offering but not one that necessarily lends itself to grocery delivery and the two retail subsectors are fairly divergent.
“In the medium term this would create two retailers under one roof, one focusing on non-food and the other on groceries”
John Copestake, The Economist Intelligence Unit
“Additionally, competition from Amazon remains strong and is expanding quickly while discount retailers, another significant market challenger to Sainsbury’s, are thriving precisely because they are keeping things simple by focusing on what they do best.
“Rather than creating a new avenue for sales, Sainsbury’s may find that it is simply opening itself up to a new front of competition.” – John Copestake, The Economist Intelligence Unit
“We remain unconvinced about the industrial logic and continue to believe that there is not a significant overlap among Sainsbury’s and Home Retail customers.
“However, looking at the deal another way, Sainsbury’s is buying about 800 Argos stores for about £1.5m each, which seems a fair price.
“The problem is that this is not simply a purchase of a large number of stores, but will incur integration risks.” – Nicla Di Palma, Brewin Dolphin
“The deal is very well executed, as it combines not overpaying for Home Retail, getting spare cash to pay back debt by using Sainsbury’s bank, probably avoiding Class 1 approval by issuing shares that don’t need shareholder approval and EPS accretion.
“What is there not to like? Risk from Sainsbury’s owning a troubled non-food retailer, in middle of Amazon’s crosshairs. In two to three years we will know whether that is more than offset by Sainsbury’s now having a cheap supply chain to double its own non-food business.” – Bruno Monteyne, Bernstein
Sainsbury’s offer for Home Retail is not a ‘knock-out’ in our view, and the deal’s financing could improve the EPS enhancement for Sainsbury’s above that suggested at a headline level.
“A significant proportion of synergies are tied up within property and so we believe this means there are only a select few with the excess space to unlock these gains.
“This makes it tougher for either an alternate buyer outside of food retail or Home Retail’s management to generate the same returns on a standalone basis.” – Alastair Davies, Investec
“The numbers stack up well and we continue to think that the commercial logic of the deal is sound from both defensive and offensive senses.
“We also think that the Sainsbury’s investment case is strong on a standalone basis.
“The numbers stack up well and we continue to think that the commercial logic of the deal is sound from both defensive and offensive senses”
James Collins, Stifel
“However, we are concerned that the Argos business is not robust, that profitability might weaken before improving and that the integration process could be painful and protracted.” – James Collins, Stifel
“Argos is a business offering a strong multichannel experience, and one that has managed to protect its market position over recent years despite the online transition of consumer spend in its core categories.
“With the integration of this supply chain in a strong natural footfall platform like that of the Sainsbury’s store network, we can see the potential for a rapid reduction in occupancy costs.” – James Grzinic, Jefferies