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Home Retail Group - possible competing offer

Steve Clayton | 22 February 2016 | A A A
Home Retail Group - possible competing offer

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After markets closed on Fri 19 February, Steinhoff International, a large South African retail group, announced that it had proposed a higher, all cash offer to the Board of Home Retail Group, owner of Argos, worth a total of 175p per share.

Home Retail itself confirmed the approach and issued a statement advising shareholders to take no action at this stage. Steinhoff are best known in the UK as the owners of Harveys and Bensons for Beds.

Sainsbury's possible offer must, unless the Takeover Panel grant an extension, be made by 5.00pm on Tues 23 Feb. Sainsbury's originally proposed terms included 0.321 new Sainsbury shares, plus cash payments totaling a further 82.8p per Home Retail share, worth around 165p given the Sainsbury's share price of 256p at the time of writing.

Our view:

Sainsbury must decide whether to walk away, or enter a bidding war with Steinhoff. The current market value of Sainsbury's offer is within 5% of Steinhoff's cash proposal, so it would not take much to leapfrog back into pole position.

For Sainsbury to walk away now, it would give the impression that their expected returns from acquiring Argos were modest. They will be busily calculating how much they think Steinhoff can justify paying, no doubt whilst spitting feathers over the late interruption of their deal.

Bidding wars are about convincing your opponent that you want the prize much more than they do, so that backing out seems their sensible course of action. The days and weeks ahead will determine whether it is Sainsbury or Steinhoff who wins the game of double bluff.

Steinhoff starts from the position of having less debt and similar EBITDA to rival Sainsbury. Steinhoff is expected to grow rather faster; consensus suggests that Sainsbury, before any benefits from acquiring Argos, will see no growth in EBITDA for several years, whilst Steinhoff is expected to grow steadily.

On the face of it, either player ought to be able to finance a higher offer, but Sainsbury probably has the strongest incentive, given the margin pressures in UK grocery. Sainsbury also has the advantage of being able to refinance Argos's consumer loan book via Sainsbury's Bank, which makes the cash cost of the offer very modest to them. We think the potential operating synergies between Sainsbury and Argos will be greater too, given that Steinhoff only really has product overlaps with Argos in the furniture categories, which the Argos Fast Track delivery offer is not suited to.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.