Sainsbury's Pursuit of Home Retail's Argos Aided by Subpar Sales

  • Planned sale of Homebase unit also smooths path for takeover
  • U.K. grocer in `a very strong negotiating position': analyst

J Sainsbury Plc’s chances of acquiring the Argos general-merchandise chain received a boost after the U.K. retailer it covets reported a disappointing Christmas.

Holiday sales at the operator of more than 800 stores fell 2.2 percent, parent company Home Retail Group Plc said Thursday, missing analysts’ estimates for a 0.6 percent increase. The performance, which sent the shares down as much as 3.3 percent, does little to sway investors against a possible takeover.

“Home Retail’s statement reads underwhelmingly as a defense document,” Freddie George, an analyst at Cantor Fitzgerald, said by phone. “I thought they’d come out all guns blazing and highlight the great opportunities they have, but now Sainsbury’s are in a very strong negotiating position.”

Sainsbury wants Argos for its distribution capability as it seeks to build a store-based and online business capable of challenging the likes of Amazon.com Inc. The U.K.’s second-largest grocer has expressed no desire for Home Retail’s other business, the Homebase home-improvement chain. Home Retail said late Wednesday that it’s in advanced talks to sell that business to Australia’s Wesfarmers Ltd. for 340 million pounds ($489 million).

Home Retail said the Homebase sale would allow it to focus on Argos, while improving its finances by removing 1.43 billion pounds of annual lease obligations. Yet some analysts doubt Argos’s prospects as a standalone business.

‘Competitively Challenged’

If completed, the sale of Homebase would leave Argos as a “competitively challenged group in a weak financial position,” Stifel analyst Scott Ransley said in a note. Amid competition from Amazon -- which offers 150 million products versus 53,000 at Argos -- sales at the chain have dropped for four consecutive quarters.

Sainsbury on Wednesday laid out its case for a possible acquisition of Argos. It said a combination would create a non-food business of a similar scale to British department-store chain John Lewis and Amazon, with a portfolio of 2,000 stores which those competitors couldn’t match.

“The question of price remains at the top of the agenda for investors, with the potential sale of Homebase making a takeover of Argos by Sainsbury that much easier,” Keith Bowman, equity analyst at Hargreaves Lansdown Stockbrokers, said by e-mail. “Home Retail’s future as an independent retailer could be coming to an end.”

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