Analysts see 'genius or madness' in Sainsbury's Home Retail offer

Brokers remained undecided and a little perplexed by Sainsbury's revelation that it is pondering making another takeover bid for Home Retail after a November offer was rejected.

Sainsbury's now has until 2 February to announce either a firm intention to make an offer or that it does not intend to make an offer.

Analysts at Jefferies said they could not decide if the potential deal is "genius or madness", with Shore Capital saying it harboured "more reservations than jubilations".

Societe Generale, which maintained a 'buy' rating on the FTSE 100 grocer, said it believed the main rationale behind the deal was to optimise Sainsbury's retail space, strengthen its non-food offering and benefit from Argos best practices in delivery and online.

Calculating that it has around 150 current stores that have too much selling space, around 6% of its estate, SocGen saw ample opportunity to reallocate this to Argos on top of the 10 trial Argos 'corners' already, which would lead to estimated potential net synergies of just £100-150m.

The French broker assumed a mixed offer of 30% cash and 70% in shares would mean the deal would become dilutive at 140p per Home Retail share with no synergies, or 13% accretive with £100m in net synergies.

SocGen added that it was concerned about the timing of the deal — "although Sainsbury's is doing a good job, it needs to be fully focused on its core business" — and the concern that Sainsbury's would lose its pure player status, resulting in increased risk profile, potential efficiency loss in terms of capex allocation.

For its part, Jefferies said it was either a sign of management's lack of confidence in prospects for the core business or a positive step in anticipating how the customer journey will develop in a multi-channel world.

Jefferies, which retained a 'hold' rating, said the bull case was perhaps the same strategy that is being pursued by Amazon that "consumers' multi-channel journey inevitably leads to a pairing of frequency of spend through repeat food consumption with transaction accretion through non-food purchases - in a cost minimising way to both consumers and service providers".

But examining the bear case highlighted Argos would have a tough act following Amazon without consequences to margins and there would be little Sainsbury could add in non-food multi-channel expertise, while analysts struggled to see meaningful sourcing or fixed-cost savings from the deal, which would therefore place most emphasis on tougher revenue synergies.

With regard to revenue synergies, ShoreCap's Clive Black said he had "been around too long to predicate a deal on the delivery of such an assertion".

Likewise he added that, whilst Argos has heritage in remote shopping, he harboured concerns the chain's ongoing exposure to competitive challenge from pure-play online such as Amazon and subsector specialists such as AO World.

He also struggled to see compelling synergies and said that, while a merger would add Argos' eCommerce capabilities and much-admired hub-and-spoke logistics system, Sainsbury’s also has to acquire a struggling business where problem solving has to be at the core. "Acquiring problems is not always the ideal route to strategic solutions."