Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

Sainsbury CEO Mike Coupe says its offer for Home Retail Group is about baking a bigger cake, one that neither British retailer could rustle up alone. Sainsbury is making sure it's getting the best slice -- financially at least.

Retail Regrets
Sainsbury and Home Retail shares have performed worse than the FTSE 100 over five years
Bloomberg

On the face of it the supermarket chain's offer looks decent for shareholders in Home Retail, which owns the Argos general goods stores. At a price of 162.9 pence -- thanks to a 2 percent rise in Sainsbury's share price on Tuesday morning -- it’s a more than 60 percent premium to where Home Retail traded before the bid interest was made public.

But the price includes 25 pence per share from selling Home Retail's Homebase shops to Australia's Wesfarmers, which Home Retail shareholders would probably have got anyway, as well as 2.8 pence in lieu of a final dividend.

Take that off, and the premium falls to about a third, pretty standard for a takeover. Some Home Retail investors had hoped -- unrealistically -- for 200 pence, explaining why the shares barely moved on Tuesday morning.

That's not to say that the deal makes sense for Sainsbury strategically. As Gadfly's noted before, it was doing pretty well on its own.

Sainsbury needs to fill excess space in its big supermarkets and the Argos concessions already operating in its stores are trading well, indicating there might be some mileage in putting the brands together. Sainsbury will become the biggest non-food U.K. retailer and hopes the Argos delivery network will help it compete with Amazon.

The combination is risky, though. Sainsbury estimates more than half of Argos's 800 or so stores have less than five years to run on their leases. But closing and relocating shops is a delicate business, and Sainsbury is banking on sales migrating from those high street stores to its supermarkets.

Sainsbury has enough to contend with without a tricky integration. Supermarket rivals Tesco and Wm Morrison are steadying, while German price-cutters Aldi and Lidl are expanding apace.

It’s a good thing, then, that Coupe has at least shown discipline on price. Still, Sainsbury needs the 120 million pounds of promised yearly synergies to make the deal pay. 

They're by no means guaranteed, and will cost a hefty 140 million pounds to implement. Plus there's another 140 million pounds needed to put Argos concessions into Sainsbury supermarkets.

Sainsbury will get its hands on about 250 million pounds of Argos cash. Then there's its 600 million-pound customer loan book. So out of the 1.1 billion-pound element of the deal that Sainsbury is funding, it reckons it's getting Argos for 250 million pounds.

Coupe's right not to overpay. Home Retail had a difficult Christmas, while Sainsbury shareholders must take it on trust that it'll do better in a combined group.

Argos Performance
Bloomberg Intelligence
(Argos only, doesn't include Homebase)

There's still a risk that the deal won't go through if Home Retail investors don't like the price. The target's shares were trading at a 6 percent discount to the offer price on Tuesday morning.

But with oft-rumored private equity buyers unable to match Sainsbury's promised cost-savings, it's hard to see other options. Argos could well turn out to be a catalog of woes for Coupe, but like any good supermarket boss, at least he's delivered on price.

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

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net