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.

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

Sainsbury may seem to have gained a clear run at Home Retail Group after Steinhoff International said it wasn't interested in buying the owner of the U.K.'s Argos chain. But the British grocer is missing one thing: Home Retail's board hasn't yet recommended that its shareholders accept Sainsbury's offer.

On Friday, Sainsbury hurriedly formalized a 1.4 billion-pound ($2 billion) bid for Home Retail so it could meet a deadline imposed by the U.K.'s takeover regulator. This was not conditional on a recommendation. Home Retail nevertheless responded reasonably warmly, saying it would "work towards" that.

Merger Chatter
Home Retail shares fluctuate as approaches to buy it come and go

In many takeover situations, the target company can extract a sweetener from a bidder in exchange for its stamp of approval. A board recommendation is always worth something to the buyer: it means both sides will work together to make the deal happen, so the financial benefits come faster.

The board of Home Retail said in February it was willing to recommend the "key financial terms" that Sainsbury outlined at the time. The proposal, denominated in cash and Sainsbury shares, was worth 1.3 billion pounds back then, or 161.3 pence per Home Retail Share. Today, Sainsbury's formal offer is worth 172 pence thanks to a rise in the bidder's share price. On the face of it, this looks an even better deal.  

But there's more to it than that. Home Retail also said in February that its initial approval was subject to its "fiduciary duties," and agreement on terms and conditions and due diligence. This is the get-out clause that allows Home Retail to take its time in giving a final recommendation.  

Home Retail has a duty to its own shareholders to try to get the very best price possible. And Sainsbury can afford to pay more: alongside Friday's offer, it revealed that the projected cost savings and sales gains from the deal are higher than it thought, some 160 million pounds annually up from a previous estimate of 120 million pounds.

Adding Up
Annual financial benefits of combining Sainsbury and Home Retail Group
Source: Sainsbury

A recommendation may have special value here too: the display of harmony could help deter any other bidders coming out of the woodwork and triggering an auction.

Sainsbury's offer isn't going away. An extra 3 pence would take the bid to the 175 pence level that Steinhoff had dangled in front of Home Retail, and would cost an additional 24 million pounds, affordable in the context of the revised benefits.

The value of a recommendation means Home Retail's directors still have some degree of leverage over Sainsbury's. They should use it.

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

To contact the authors of this story:
Chris Hughes in London at chughes89@bloomberg.net
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net