Argos Is Anything But a Bargain

Takeover battle might not put much more money on the table

Home Retail Group is doing little to encourage its rival suitors to get into an auction for the U.K. shopping chain.

The Argos owner’s trading update on Thursday seems unlikely to lift the group’s standalone valuation substantially, and puts scant pressure on bidders Sainsbury and Steinhoff to lift their proposals. With Home Retail shares trading at a premium to both approaches, the temptation for investors to cash out now by selling in the market remains high.

Sainsbury has said it might make a cash and shares offer worth 169.09 pence per Home Retail share based on its own price today. Steinhoff, a South African shopping conglomerate, is mulling a 175 pence offer in cash. Neither is yet on the hook to follow through with a formal offer. Sainsbury is in the middle of due diligence.

Hope Value

Shares have jumped this year in expectation of bidding battle

Bloomberg data

Home Retail's current 180.8 pence share price reflects hope that one of suitors will launch a formal offer at a level higher than indicated, or trump the other.

But neither will be feeling under much pressure right now. Home Retail said underlying sales in Argos were broadly flat in the first eight weeks of 2016, helped by strong furniture sales. The gross margin was up 75 basis points, pleasing some analysts who feared a decline. Best of all, the company said it had ended its financial year with underlying net cash of 310 million pounds ($440 million) – well in excess of estimates and largely reflecting disciplined working capital management. This is positive, just not good enough to change the game in a bid situation.

Argos Agonies

Same store sales growth has suffered in recent quarters

Bloomberg Data

What then would justify a bid comfortably above the current market value of 1.47 billion pounds? This already equates to an expensive a 5.4 times enterprise multiple for a low growth business, and a premium of 663 million pounds to the undisturbed market value. Sainsbury boss Mike Coupe will have to unearth some decent synergies to go higher, or risk the ire of his own shareholders. Steinhoff may feel it can justify a more generous offer on the grounds of buying an earnings stream based in sterling rather than the rand.

Home Retail shareholders can probably relax that their shares aren’t going back to the pre-offer 98.7 pence as a deal of some sort still seems likely. But they shouldn't count on their chances of getting considerably more than is in the price now.

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

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