Sainsbury Bids $2 Billion for Argos, Steinhoff Picks Darty

  • U.K. grocer leaves terms of original proposal unchanged
  • Synergy target increased by a third to 160 million pounds

J Sainsbury Plc proceeded with its takeover bid for Home Retail Group Plc after a South African rival that threw in a competing proposal dropped out of the race.

The U.K. grocer offered about 1.4 billion pounds ($2 billion) in cash and stock for the owner of the Argos retail chain after Steinhoff International Holdings NV decided to buy Darty Plc instead. Sainsbury didn’t change the terms of its original proposal, now worth about 171 pence a share, though increased its estimate of the deal’s profit benefits by a third.

Sainsbury Chief Executive Officer Mike Coupe made his move minutes before a U.K. Takeover Panel deadline and an hour after Steinhoff ended a tussle for control of Home Retail by walking away. The South African company will instead buy Darty for 673 million pounds, snatching the European electronics retailer from France’s Groupe Fnac SA.

Steinhoff probably decided Home Retail “is not a sufficiently attractive asset,” Exane BNP Paribas analyst Simon Bowler said. “Argos is an unusual asset, and the complexities of running its business are not core to where Steinhoff’s strengths lie, and directing capital at more aligned businesses is likely a safer strategy.”

Sainsbury doesn’t yet have the backing of Home Retail’s board for what would be its biggest acquisition ever, although Home Retail said that it “looks forward” to working with Sainsbury towards a recommendation. The grocer estimated that buying Home Retail will result in at least 160 million pounds of profit benefits by the third year after completion, more than its previous forecast of 120 million pounds.

Surprise Increase

“The increase definitely surprised us,” David Payne, an analyst at Nomura, said by phone.

Sainsbury also reiterated that it expects double-digit earnings per share accretion. The supermarket is seeking to buy a business that operates more than 800 shops selling everything from jewelry to televisions. Argos’s extensive U.K. distribution network would provide scope to take on the likes of Amazon.com Inc. in the booming online market.

About half of the deal’s profit benefits will come from closing some Argos stores and putting them inside Sainsbury’s supermarkets, extending a trial that started last year. In a call with reporters, Coupe raised his estimate for how many Argos concessions could go in his supermarkets, and said he sees higher savings on costs like rent.

Trumping Fnac

Steinhoff’s Conforama furniture unit will pay 125 pence in cash per Darty share, trumping Fnac, which last year had an all-stock offer accepted that’s now worth 120 pence a share. Darty will bring Steinhoff more than 400 stores across France, Belgium and the Netherlands and more than 3.5 billion euros ($4 billion) in sales.

Home Retail shares fell 9.9 percent to 163.2 pence at the close of trading in London, while Sainsbury dropped 3 percent to 273.2 pence. Darty eased 0.6 percent to 130 pence, while Fnac fell 0.5 percent. A spokesman for Fnac did not immediately return a call seeking comment.

Steinhoff has raised about $1.3 billion in financing for the Darty deal, people familiar with the matter said. The bridge loan, arranged by HSBC Holdings Plc and Citigroup Inc, provides the company with leeway should a bidding war emerge and covers costs associated with the bidding, the people said, asking not to be named because the deliberations are private.

The purchase of Darty will accelerate a European acquisition spree by Steinhoff. The South African company, led by Chief Executive Officer Markus Jooste and South African billionaire Christo Wiese, wants to challenge the likes of Sweden’s Ikea by expanding in Europe after moving its primary share listing to Frankfurt in December.

Steinhoff, founded in Germany by Bruno Steinhoff in 1964, owns the Bensons for Beds chain in the U.K. along with France’s Conforama. The company, while run from South Africa, moved its corporate domicile from Johannesburg to Amsterdam. The company employs 90,000 people and has more than 6,500 stores in 30 countries from the U.K. to Australia.

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