Sainsbury Shakes Up U.K. Retail Landscape With Home Retail Bid

Photographer: Chris Ratcliffe/Bloomberg
  • Home Retail stock rises 41 percent on news of rejected offer
  • Deal may push Sainsbury into closer competition with Amazon

The U.K. retailing landscape just shifted.

Beset by competition from discounters and online encroachment from the likes of Inc., J Sainsbury Plc chief Mike Coupe has decided that the best plan is to fight his way out of a corner. His rejected advance on Home Retail Group Plc marks a shift in strategy for a profit-challenged industry that has mostly avoided consolidation as a means of growth.

“Sainsbury’s approach serves as a reminder of the weakness of U.K. food retailers and the desperation embedded in their strategic thinking,” Tony Shiret, an analyst at Haitong Securities, said in a note.

Home Retail shares surged 41 percent Tuesday as investors wagered that Sainsbury will be prepared to pay what it takes to secure the prize. A deal would broaden the company’s distribution network in a market where the timely delivery of goods is crucial, while also making better use of unproductive store space. Yet Sainsbury shares fell amid skepticism about the logic of purchasing a business that has struggled to grow over the last decade.

By moving further into product categories including jewelry and televisions, Sainsbury risks straying further onto the radar of Amazon. Argos, whose shoppers pick products from a catalog and have them brought out from a back room or delivered to their home, has been one of the U.K. retailers to suffer most from Amazon’s expansion.

More recently, Amazon has been encroaching on Sainsbury’s patch with the November introduction of its Pantry grocery-delivery service in the U.K.

Matching Amazon’s service standards is a “tough act to follow” without consequences for profitability and there’s little expertise Sainsbury can add in Argos’s main product areas, James Grzinic, an analyst with Jefferies, said in a note.

Cost Benefits

Sainsbury disclosed on Tuesday that a cash-and-stock bid for Home Retail was rejected in November, giving it until Feb. 2 to decide on whether to make a formal offer. The approach undervalued Home Retail, according to the Milton Keynes, England-based target, whose market value surged to about 1.1 billion pounds.

Sainsbury could justify paying as much as 1.3 billion pounds, according to Simon Bowler, an analyst at Exane BNP Paribas. He estimates that the combination could produce cost benefits of 100 million pounds to 150 million pounds, including the closure of some of Argos’s 800-plus stores.

Sainsbury is no stranger to Home Retail, after opening Argos outlets in about 10 of its supermarkets last year.

“It’s extraordinary that they would decide this deal would make sense on the basis of a very short trial period," Charles Allen, an analyst with Bloomberg Intelligence, said by phone.

Homebase Sale?

Sainsbury said revenue would benefit from selling to each others’ customers, as well as increased scale.

The grocer’s statement made no mention of Homebase, the do-it-yourself chain which it jointly founded in 1979 and later sold. That may indicate that the grocer has a buyer lined up for the business, according to James Collins, an analyst at Stifel. He places a value of 317 million pounds on the unit, which accounts for more than a quarter of Home Retail Group’s revenue.

Sainsbury’s chairman, David Tyler, knows Homebase from his time as finance director of GUS Plc, which acquired the chain in 2002 and spun it off with Argos in 2006, creating Home Retail Group.

Morgan Stanley & Co. and UBS are advising Sainsbury.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE