Sainsbury's yet to win over analysts as path cleared for Home Retail offer

Sainsbury's has not entirely won over analysts despite being allowed an unchallenged path to the takeover of Argos owner Home Retail on Friday, with several remaining neutral and Goldman Sachs maintaining a 'sell' rating.

After Steinhoff International unexpectedly withdrew its rival bid on Friday afternoon, Sainsbury's announced a cash and share offer one minute after market's closed for the week.

The offer was the same as that made on 2 February, thought the value of the deal has risen to 173.2p for each HRG share thanks to the appreciation of the grocer's own share price in the interim.

For each of their shares, HRG shareholders will be entitled to receive one 0.321 new Sainsbury's shares and 55p in cash, as well as a 27.8p-per-share special dividend of HRG's cash mostly from its recent sale of Homebase.

Having crunched the numbers again, Sainsbury's also said it now expects EBITDA synergies of not less than £160m in the third full year after completion, £40m more than its previous estimate.

The supermarket group and the trustee of the Home pension scheme have reached agreements with regards to the future funding of the Home pension scheme, if the deal completes.

Under this agreement, Argos would pay an additional £40m yearly sum in deficit contributions and a £50m lump sum following completion.

The bid for HRG has not earned board approval from the target just yet albeit with Steinhoff out of the way, Shore Capital analysts said "this may prove not to be tremendously challenging for Sainsbury's to receive".

The Argos board published a release after market close stating that it "looks forward to working with Sainsbury’s towards a recommendation of the offer", which would see HRG shareholders own circa 12% of Sainsbury's equity.

ShoreCap said it was "warmer than cooler" but needed firmer numbers before putting out a more definitive recommendation, based upon forecasts for the medium-term to allow us to move beyond its present 'hold' stance.

Agreed earnings boost

Although it did not take a view on the likelihood of the proposed deal taking place, Goldman Sachs said its 'scenario analysis' suggested the deal would be reap an extra 18-30% earnings per share in year-three post deal at an achieved synergy range of £120-160m and depending on whether additional pension contributions are considered earnings dilutive.

Goldman retained its 12-month target price of 185p on Sainsbury's stock, based on a discounted cash flow with an 8% discount rate and 1% terminal growth.

Jefferies was perhaps one of the most positive, agreeing the addition of Argos would be a "helpful dynamic" by providing a potentially meaningful source of new earnings at a time when the outlook for the core business remains uncertain, leading it to see this as a net positive for Sainsbury's.

"We believe that the deliverability of savings is strongly underpinned by the ability to wind down lease structures at Argos. We are less certain about the extent to which the Argos trials in Sainsbury stores can provide more confidence on sales retention and/or growth. We will also need to audit how Argos’ commercial proposition currently stacks up in what is a rapidly changing context."

Societe Generale analysts said the deal made sense as part of a reaction to the ‘online’ revolution and rapid changes in customer behaviour which are forcing traditional players to adapt their business models and accelerate their multi-channel strategies.

"But at this stage we have some concerns on the potential HRG deal, partly explaining our recent downgrade from 'buy' to 'hold': 1) Risky timing as UK food retailing has not yet stabilized; 2) loss of the pure player status; 3) uncertain synergies."

Nomura has already attributed £120m of synergies within its 280p Sainbury's target price, anticipating £90m from occupancy, £60m from one-quarter of Argos rents being relocated but sales if anything gaining, £25m from central costs, and just £5m from Tu and from joint buying.

"We do not move to add the extra £40m, but note that if we did, it would add £360m - 15p per SBRY share - to our target price," Nomura added.