James Boxell is an editor with Bloomberg Gadfly. He worked previously at the Financial Times in a variety of writing and editing jobs. Before becoming a journalist, he helped launch a legal technology startup.

Argos has been a quirky presence on the British high street for more than 40 years, a handy place for those seeking anything from cheap jewelry to reasonably-priced vacuum cleaners. But the rise of Amazon has left its business model, a unique collision of home-shopping and city-center stores, looking like a well-thumbed version of one of its catalogs: slightly tatty.

Shares Slide

That's opened the door to possible bid interest in Argos owner Home Retail Group, according to the Sunday Times newspaper, as private equity firms ponder whether this is a bargain to compare with a 19.99 pounds ($30) diamond heart pendant. (The newspaper didn't identify the bidders or say where it got the information.)

It's easy to see the allure, though. The company's market value has fallen to 899 million pounds after a 43 percent plunge in its shares over the past year. Yet analysts at Investec estimate it will have net cash of more than 200 million pounds this year and a loan book of 600 million pounds from its hire-purchase programs. Home Retail Group trades on about 11 times estimated current-year earnings, compared with 17 times for the FTSE 350 index of general retailers.

The company wasn't helped by last month's profit warning, in which the retailer admitted that an expected surge of orders on Black Friday -- the U.S. post-Thanksgiving discounting frenzy that's been imported to Britain -- would potentially be disruptive.

That was hardly an endorsement of CEO John Walden's attempt to modernize the Argos operating model and respond better to Amazon's digital supremacy. Yet it does suggest there are potential rewards for a management team that can get this right. Even Amazon might be a possible suitor given that it could use the Argos stores as ready-made click-and-collect sites for its own orders.

Plus Home Retail also owns the Homebase home-improvement chain, a business that appears more resilient to the Internet onslaught, at least judging by the number of customers wandering through the gardening aisles on a Saturday afternoon. It's a clear candidate to be spun off by a private-equity buyer. 

Obviously, the trading position of Argos means any buyer will be cautious -- they'll probably hang on to see just how terrible Christmas is before considering a punt. Home Retail also has substantial rent liabilities, although average lease terms are reducing.

That said, it still managed to generate close to 200 million pounds of operating cash flow last year. If Argos follows Marks and Spencer's lead in pursuing margin improvement over sales growth, it may be able to maintain or even grow that. 

Home Retail's Operating Cash Flow

Private equity doesn't have a blemish-free record in retail, with the implosion of Phones4U a cautionary tale, and any long-term rises in interest rates will only squeeze U.K. consumers' spending. But there's enough promise in Argos to suggest it wouldn't just be a shiny but ultimately worthless trinket. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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