Consumer

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Sainsbury didn't have to resort to a brawl in the bargain bin.

On Friday, Steinhoff International walked away from talks to buy Home Retail Group, the publisher of the Argos catalog, leaving the way clear for Sainsbury to buy it -- without getting drawn into an auction.

That should reassure the British supermarket chain's investors. It will be of no comfort to the hedge funds that had been betting on a sweeter offer emerging. For them, Home Retail's near 10 percent decline in little more than an hour has given a new meaning to the term "Black Friday."

Arbs Burned
Home Retail's shares dived after Steinhoff walked away from talks to buy the company
Source: Bloomberg

Home Retail shares had climbed to more than 180 pence in recent weeks amid speculation of a higher offer. With Steinhoff out of the picture, Sainsbury was able formalize the approach it made in February with the terms unsweetened: it's worth 170.5 pence, based on Friday's closing prices. Home Retail closed at 163.2 pence, minutes before Sainsbury confirmed its bid.

Argos Question
Sainsbury shares have fluctuated as it held talks to buy Home Retail Group
Source: Bloomberg

All that's left is for Home Retail to recommend the offer, as it previously said it would. The chances of another bidder stepping in now look remote.

For Sainsbury CEO Mike Coupe, it's a good result. He has increased the annual financial benefits he expects to reap from the deal by a third to 160 million pounds ($232 million). These are worth almost 900 million pounds up front, capitalizing them at 10 times and adjusting for tax and one-time expenses.

Sainsbury's 1.4 billion-pound offer is worth 584 million pounds more than Home Retail's market capitalization before the takeover talks leaked in January. That premium is comfortably covered by the projected value the deal will create.

True, this number includes some anticipated increases in sales. Those are much harder to generate in a deal than cost cuts. While Coupe has at least avoided bidding against himself, he still has to prove that this deal isn't going to be a distraction and will do something special for Sainsbury shareholders.

For merger-arbitrage funds, it's a reminder to temper optimism about an auction with reference to fundamental valuations. As Gadfly has argued, Home Retail's most recent trading update didn't reveal much hidden value that would support hopes of a bidding war. Steinhoff couldn't make the numbers work. It was also openly interested in another target, French retailer Darty. It would have been a stretch to do both deals -- and so it proved.

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

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net