Sainsbury's mulling new offer for Home Retail after approach rejected

Sainsbury's has revealed it is still considering making a takeover offer for Home Retail after a November approach for the FTSE 250 retail group was rejected.

The FTSE 100 grocer said it was considering its position but there was no certainty that this will result in a formal offer, after the board of the Argos and Homebase owner rejected its initial shares-and-cash proposal before Christmas.

Although takeover rumours have been swirling around it, Home Retail has been one of the most shorted stocks on the London Stock Exchange since it issued a profit warning in September due to the uncertainty around Black Friday.

Sainsbury's, which last year began trialling a number of Argos concessions in its stores, originally founded Homebase before selling the DIY chain in 2000 for an initial £635m cash in a dual transaction with Schroder Ventures and Kingfisher.

The grocer's current chairman, David Tyler, was finance director of GUS Plc, which acquired Homebase two years later and then in 2006 added it to Argos to create Home Retail Group.

In a stock exchange statement on Tuesday, the supermarket group said that it believed "the combination of Sainsbury's and Home Retail Group is an attractive proposition for the customers and shareholders of both companies, establishing a platform for long-term value creation".

"The combination is an opportunity to bring together two of the UK's leading retail businesses, with complementary product offers, focused on delivering quality products and services at fair prices, through an integrated, multi-channel proposition."

Sainsbury's added that the combination of the two companies would "deliver profitable sales growth" through a wide geographic and product offer, as well as emphasising both sides' multi-channel capabilities and delivery networks.

Based on the 2015 Argos concession trials, the grocer said a merger would "optimise the use of their combined retail space", while also proposing some property rationalisation and citing the potential sale of Sainsbury's products and services through Argos's network.

Early last month reports emerged that Nicholas Marshall, former CEO of Garden Centre Group, was putting together a bid for Homebase with private equity backers, while a few days later it was reported that France's Leroy Merlin and South Africa's Steinhoff were both examining the DIY chain, which helped lift Home Retail's shares momentarily before they later fell below 100p for the first time since 2012.

Nevertheless, according to Bloomberg, Home Retail is the most shorted in FTSE 350 general retail index, while Sainsbury is the second most shorted stock in Stoxx 600 Retail index.

Sceptical analyst reaction

Market analyst Chris Beauchamp at IG was somewhat sceptical of the benefits: "It’s nice to see a bit of outside the box thinking in supermarkets, although I can’t help feel it’s a bit of a frying-pan-to-fire to move into DIY and general retail. Still, Sainsbury’s has the cash to go shopping, even if Tesco has a bigger war chest.

"Poor old Morrisons – if supermarkets look to be partnering up it will probably end up friendless, given it only has £156m in cash and equivalents versus £1.2bn for SBRY and £2.2bn for TSCO."

Atif Latif, director of trading at Guardian Stockbrokers, added: "Home Retail has always been a favourite for a takeout target, given the poor performance of late in the sector and synergies that will allow significant shareholder value to be extracted. The current price of HOME does not reflect close to fair value and we see this as a plausible deal and if SBRY walk aways another suitor would enter the frame."

Latif made reference to the talk around Marshall's interest in Homebase and said he would not be surprised to see the price continue to rise as analysts see unlocked value that could be extracted at nearly twice the current share price.

Keith Bowman, analyst at Hargreaves Lansdown, said the early reaction in Sainsbury's share price pointed to investor caution and left Home Retail "firmly in play".

"Home Retail remains a company in transformation, with sales at Argos still yet to convince, whilst the combination of food and non-food, combined with a bank offering, to some degree, potentially reflects the still troubled Marks & Spencer. The changed world of the Food Retail sector, following the rise of the discounters, continues to unfold, with the question of price, as always, key and as yet unknown."

He suggested Sainsbury could benefit by selling Homebase, again, and would be interested in Argo’s close relationship with eBay.

Another market commentator who wished to remain nameless, said he was surprised by the bid as, while the revamped Argos "is not a sure thing in the face of competition from the likes of Amazon and traditional competitors such as Dixons. I would have thought Sainsbury's money would be better spent developing their own online segment beyond groceries”.

Shares in Sainsbury's jagged down from above 251p to near 240p on the initial publication of the statement before bouncing back slightly to 248.9p at 1248 GMT, a 2.5% fall on the day. Home Retail's stock was up 32% to 130p at the same time.