Home Retail surges ahead of possible bidding war

Shares in Home Retail surged on Monday following media reports over the weekend that Sainsbury’s could seek an extension to the Takeover Panel’s 18 March deadline, after South African retailer Steinhoff made an offer to the Argos owner.

Late on Friday, Home Retail confirmed it had received an approach from Steinhoff regarding a possible cash offer for the company at 175p per share.

Home Retail said the board was reviewing the proposal with its advisers and would make an announcement in due course.

Independent retail analyst Nick Bubb said that with a market cap of about €18bn, it can be assumed that Steinhoff has the cash resources to fund the 175p bid and.

“With the Conforama chain in Europe and Harveys and Bensons in the UK, there are plenty of synergies in furnishings and electricals for them from owning Argos, so it looks like Sainsbury has a real fight on its hands,” he said.

“TheSteinhoff 175p cash bid is cleverly pitched, as if Sainsbury want to top it they will be pushing towards the 200p level that they openly scoffed at a few weeks ago, when some Home Retail shareholders demanded a bid of 200p plus,” Bubb added.

Meanwhile, Shore Capital said Sainsbury’s – which has yet to formally respond to Steinhoff – has been very opportunistic, creative and entrepreneurial with its bid for Home Retail, including the utilisation of the debtor book and the combination with Sainsbury's Bank.

“However, Sainsbury's management has also repeatedly stated that it will not overpay for the Argos business,” the brokerage said.

“Entering a bidding war with Steinhoff, noting the cash element ‎of the new bidder, would show determination but may test the resolve of its shareholders and the assumption of not over-paying given the risks involve.”

Shore said that kicking the bid into touch, however, would be a major disappointment to Sainsbury’s boss mike Coupe.

“We could clearly understand if Sainsbury's decide to walk away at this juncture.”

Societe Generale said that if Sainsbury’s wants to buy Home Retail, it will have to raise its bid

“All things being equal, the sensitivity is as follows: a 10% increase in Sainsbury’s bid price would offset 10% of potential value creation driven by synergies (management’s target is ‘at least £120m at the EBITDA level’),” the French bank said.

“Given Sainsbury’s limited financial leeway, we think it would be difficult/risky to make a 100% offer in cash,” it said noting that Steinhoff’s offer is 100% cash versus only 50% for Sainsbury’s.

Sainsbury’s has made a cash and shares offer of 161.3p per share for Home Retail.

At 1010 GMT, Home Retail shares were up 12% to 172.38p while Sainsbury’s was down 1.8% to 256.60p.