Consumer

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

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's bid for Home Retail Group risked being the bargain that looked great in the shop, but not such good value once you got it home.

When Steinhoff International said in mid-February it too was mulling a deal for the Argos owner, Sainsbury risked getting dragged into a costly auction. After the South African retailer's surprise withdrawal a month later, Sainsbury was able to formalize its 1.4 billion pound ($2 billion) offer, only to find that Home Retail was withholding its recommendation.

Two weeks later, Home Retail has finally given its blessing. For Mike Coupe, the Sainsbury CEO who's pinning his reputation on the deal, it has come without having to throw in a last sweetener.

Adding Value
The value of Sainsbury's offer for Home Retail Group has risen along with its stock price
Source: Bloomberg

That is good news for Sainsbury's shareholders. The logic of Sainsbury buying Argos -- a catalog store that's trying to invent itself as a whizzy online retailer -- has been almost universally questioned. The one thing going for the deal was that Sainsbury wasn't overpaying. Factor in the cost savings and the grocer is getting Argos at a price as cheap as its jewelry ranges.

It says a lot about the companies' relative negotiating positions that Home Retail didn't withhold its recommendation for longer, and try extracting more from Sainsbury. After all, Sainsbury could have easily afforded to add a few more pennies to its 170 pence per share offer: it envisaged some 160 million pounds of cost and revenue benefits from the combination.

But Sainsbury had a really strong hand. There's very little chance another bidder could find similar cost savings to fund a rival offer.

Argos Underperforms
Argos's same store sales have been stubbornly negative
Source: Bloomberg

Home Retail's business model was struggling. Argos had battled for years to improve sales amid competition from Amazon and supermarkets, despite a costly turnaround plan. Home Retail had said in February the price was right and so would have had a credibility issue were it to fight for more, even if its shareholders may have been well served by it doing so.

The deal has now been restructured as a "scheme of arrangement," which offers a speedier legal path to completion. Home Retail's capitulation reveals that there was nothing in it for Sainsbury to pay more, and Home Retail was keen to get moving with a deal that secures Argos's future.

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

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

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