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

A lesson from retail history. In 1999, Kingfisher, a sprawling British shopping empire, agreed an all-share merger with English supermarket chain Asda. At the last minute, Wal-Mart trumped the friendly deal with a 6.7 billion-pound ($9.5 billion) cash offer.

Within a few years, Kingfisher CEO Jeff Mulcahy was gone and the conglomerate broken up.

It's a warning for Sainsbury boss Mike Coupe. He thought he'd bagged a 1.3 billion-pound cash and shares deal for Home Retail, owner of Argos. But Steinhoff, a South African group backed by billionaire Christo Wiese, has put a 1.42 billion-pound cash bid on the table.

In all bids, cash is king. Long-suffering Home Retail shareholders will almost certainly prefer to rid themselves of continued exposure to Argos, given its patchy trading. It was pretty unloved before Sainsbury turned up.

Pricing Power
Home Retail's shares languished before the Sainsbury bid
Bloomberg data

Steinhoff's 175p per share offer -- even excluding the 25p per share portion it would get from an already agreed sale of Home Retail's D-I-Y chain Homebase and 2.8p in lieu of a final dividend -- is an almost 50 per cent premium to the price before Sainsbury's interest became public.

Sainsbury could match Steinhoff's offer without too much trouble in cash and shares. After all, adding another 10 pence to its offer (worth about 165 pence a share at today's price) equates to about 80 million pounds. Part of Sainsbury's funding for the deal involved transferring a 600 million-pound customer loan book from Argos to Sainsbury's bank. It reckoned that after this, Argos would cost it just 250 million pounds. A 175 pence cash and shares offer from Sainsbury wouldn't dilute earnings, and Coupe may be able to dig out more synergies.

The problem is that Steinhoff is unlikely to just give in and still has that cash offer as a selling point. Sainsbury will find it difficult to get into a bidding war with a deep-pocketed rival and would struggle to match Steinhoff's cash.

Sainsbury has been one of the more leveraged grocers, with 1.5 billion of net debt at the end of September. Its net debt was 27 percent of total equity at the time, according to Bloomberg data, compared to 14 percent at Steinhoff at the end of June.

As my colleague Brooke Sutherland argued, Sainsbury should walk away. The deal's strategic logic was always questionable, but at least Sainsbury looked to be getting Argos for a price as cheap as its Elizabeth Duke jewelry range. 

But while quitting's the right thing to do, it would leave Coupe in a tight spot. Sainsbury was doing fine before he made the approach. Quality products, canny advertising, and lower prices were paying off, with sales doing better than rivals. It wasn't saddled with lots of giant stores, and Coupe was already making plans to fill excess space -- including putting Argos concessions in stores. 

Selling Point
Sainsbury has managed the decline in same-store sales relatively well
Source: Bloomberg intelligence

But the Home Retail approach told the world Coupe thinks there's a hole in his plan for Sainsbury -- one Argos would fill. It was a bet that more general merchandise would help it compete better with Amazon, while the Argos just-in-time delivery network would also improve the Internet side of the business.

To end up empty handed would leave Coupe exposed, as Gadfly has argued before. Suggesting a strategic rethink is needed and not delivering is dangerous for any CEO, let alone one at the helm of a company with a history of being a target. Back in 2007, it was besieged by bids from a CVC-led group and a Qatar-backed investment fund. The Qatar Investment Authority still owns a 25 percent stake, handy for anyone seeking to gain control of Sainsbury.

So with all the recent talk of supermarket mergers -- or "Megashop" -- Sainsbury could find the hunter becomes the hunted.

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

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Andrea Felsted in London at

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James Boxell at