Sainsbury's Slippery Slope

Paying up for a deal that's questionable anyway would be a mistake for the U.K. grocer.
At Closing, June 18th
310.00 GBp

Sainsbury's takeover of Home Retail was already of questionable logic. Getting into a bidding war for the struggling company would be even less sensible.

Steinhoff International Holdings -- a furniture chain once based in South Africa that's seeking to expand in Europe --  made an offer of about $2 billion for Home Retail on Friday that threatens to derail Sainsbury's agreement to buy the operator of the Argos chain. 1 Not only is Steinhoff offering a higher price, it's proposing to pay for the British retailer all  in cash. The onus is now on Sainsbury to come up with a counterbid of its own. Maybe it should walk away instead.

Worth Paying Up?

Sainsbury is already offering a substantial premium over where Home Retail was trading before news of deal talks broke.

Source: Bloomberg

Sainsbury,  a U.K. grocery chain, wants to use Argos goods to fill extra space on its shelves and tap Home Retail's expertise in click-and-collect services -- which allow customers to shop online and pick up their purchases at stores -- in the fight against Amazon. But as my colleague Andrea Felsted has noted, Sainsbury has been successful in navigating a fiercely competitive market because of its focus on cost cuts and investments in quality. This deal is a diversion that it doesn't need and that won't necessarily revive growth.

Flattening Out

Sainsbury's revenue growth has stalled and buying Home Retail won't necessarily fix that.

Source: Bloomberg

The only saving grace was that, at the agreed-upon price, Sainsbury got Home Retail on the cheap. The headline number for the transaction announced earlier this month is 161.3 pence a share in stock and cash, but that includes 25 pence for the already announced sale of Home Retail's Homebase DIY chain to Australia's Wesfarmers and 2.8 pence in lieu of a dividend. So really the cost to Sainsbury is more like 133.5 pence a share. Steinhoff also includes the dividend and Homebase payout as part of its bid, but it's offering 147.2 pence in cash for the rest.

To best Steinhoff, Sainsbury is probably going to have to offer substantially more to make up for the lower cash component. Does it really want to go down that road? Because it's not really ponying up the full 161.3 pence of its current agreement, Sainsbury could probably afford to raise its bid a bit. What it can't do is offer all cash, given balance sheet constraints.

Steinhoff must be serious about wanting Home Retail to get involved this late in the game. The company has been trying to expand in Europe and even moved its headquarters to Amsterdam as it seeks to counter less-than-ideal economic conditions in its previous home base of South Africa. Buying Home Retail would go a ways toward helping Steinhoff increase its European presence and seems to be the type of thing for which it would be willing to pay up.

For its part, Sainsbury has already signaled it wants to be disciplined on price. Talks stalled with Home Retail at one point because the company wanted more than Sainsbury was willing to pay, people familiar with the matter told Bloomberg News. 

Whether Sainsbury will counterbid remains to be seen. But as Haitong retail analyst Tony Shiret said when news of the deal talks first broke: If Sainsbury gets forced to pay up, “it all looks an expensive potential banana skin.”

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. While Sainsbury and Home Retail have announced the terms of the deal, they had yet to hammer out a formal offer. Sainsbury had until Feb. 23 to do so. 

To contact the author of this story:
Brooke Sutherland in New York at

To contact the editor responsible for this story:
Beth Williams at

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