With mighty Steinhoff wading into the Home Retail battle, Sainsbury’s may regret being seen to be so keen on the Argos deal.
The indicative Steinhoff 175p cash bid for Home Retail announced on Friday evening clearly topped the possible Sainsbury’s offer of 160p/165p in shares and cash, but it was cleverly pitched.
If Sainsbury’s wants to top it it will be pushing towards the 200p level that the grocer openly scoffed at a few weeks ago.
While we wait for Sainsbury’s to respond ahead of the new ’put up or shut up’ deadline of March 18, it is worth reflecting on how well Sainsbury’s has handled things so far, because three tactical mistakes appear to have been made.
The first mistake, in this game of M&A poker, was making too clear early on in the process just how keen Sainsbury’s management is on buying Argos.
Sainsbury’s didn’t have to say anything in its third-quarter trading update on January 13 about the bid for Home Retail (which was announced on January 5). But Mike Coupe and John Rogers went to great lengths on the analysts’ conference call that day to discuss their approach and their interest in Argos – even allowing the call to last for longer than an hour and a half.
The second mistake was to boast on February 2, on the back of a detailed bid announcement, about how clever Sainsbury’s had been to finance much of the indicative cost of the £1.1bn value of the offer from restructuring the £600m Argos loan book.
Financial director John Rogers even went so far as to claim that it would be effectively buying the whole of Argos for only £250m.
Striking a balance
Clearly there is a balance to be struck in these situations between saying what is needed to support your own share price (and the Sainsbury’s share price has been under pressure, from sceptics of the Argos deal and sceptics of the core supermarket business’s outlook), but it might have been wise not to alert others to all the cash locked up in the Argos loan book.
Sainsbury’s does not hold a monopoly in the field of tactical M&A mistakes. Home Retail management has not exactly played a blinder so far either
And the third mistake was to scoff at the Home Retail shareholders who had demanded a bid of 200p-plus, given that the shares had been as low as 90p in mid-December, even though it gave Sainsbury’s management the opportunity to say that they would not “over-pay” to get hold of Argos.
But Sainsbury’s does not hold a monopoly in the field of tactical M&A mistakes. Home Retail management has not exactly played a blinder so far either.
The mistake that Home Retail made was in not informing shareholders back in November that it had received potential bids for Argos and Homebase, because if it had then the share price would never have reached as low as 90p to 100p – which Sainsbury’s keeps pointing to as a justification for not paying over 200p.
The first that Home Retail shareholders knew of all this was on January 5 when it confirmed that in November 2015 it had received (and rejected) an approach from Sainsbury’s regarding a possible cash and share offer for the company (thought to have been around the 130p a share level).
Then on January 18, with the announcement that Home Retail had agreed to sell Homebase to the Australian group Wesfarmers, owners of the Bunnings DIY chain, it was revealed that “Wesfarmers provided the group with a firm offer letter in November”. The Home Retail share price traded between 112p and 97p in November.
So has Steinhoff made any mistakes yet? Well, it might not have expected sterling to fall on fears of ‘Brexit’, but otherwise it seems to have quietly prepared the ground.
At the end of last year it moved its main stock market listing to Frankfurt to reflect the main centre of its trading operations, and made clear that it wanted to expand its interests in UK furniture and furnishings.
So has Steinhoff made any mistakes yet? Well, it might not have expected sterling to fall on fears of ‘Brexit’, but otherwise it seems to have quietly prepared the ground
Back in 2005/06 some readers will recall Steinhoff taking over the old Homestyle furniture retail group at a time when its UK operations were limited to furniture and bed manufacturing.
And since then the old Harveys and Bensons businesses have not exactly thrived or expanded much in terms of store numbers, but under Steinhoff UK boss Sean Summers (a South African retail veteran) the retail operations have about £500m of annual turnover and some respectable furniture market shares when compared with Argos.
In upholstered furniture, Steinhoff claims a 7.4% UK market share (versus 1.9% for Argos). In living/dining room furniture, Steinhoff claims a 3.7% market share (versus 6.6% for Argos). And in beds, Steinhoff claims a 9.4% market share (versus 6.5% for Argos).
A combined Harveys/Bensons/Argos business would therefore be able to achieve some useful scale and buying synergies in furniture, particularly once the important manufacturing and logistics operations of Steinhoff UK are taken into account.
What we do know is that the acquisitive South African retail giant has the balance sheet to easily finance an Argos bid
On the other hand, Steinhoff wouldn’t have the same scope as Sainsbury’s to ‘implant’ Argos units as their leases come up for renewal, but then we don’t know the full strategic rationale for the Steinhoff approach as they have wisely kept their own counsel on the subject so far.
What we do know is that the acquisitive South African retail giant has the balance sheet to easily finance an Argos bid and that its market cap of about £14.5bn is nearly three times the size of Sainsbury’s.
So the odds now look stacked a bit against Sainsbury’s.
But there may yet, in a worst case scenario, be scope to salvage something from the situation, by offering Steinhoff to help in transferring Argos implants from nearby Homebase stores to Sainsbury’s supermarkets and developing a commercial relationship as a concession partner for Argos.
- Nick Bubb has been a leading retailing analyst for more than 30 years. He is a well-known commentator on UK retailing and is a founder member of the influential KPMG/Ipsos Retail Think Tank