SocGen cuts Sainsbury's, says Home deal increases risk profile

The bank said the timing of the deal was inappropriate, with UK food retailing still facing challenging market conditions and strong deflation.

It said although Sainsbury is doing a good job, it would have done better to stay focused on the core business in the short term.

In addition, it argued the supermarket retailer would lose its pure-player status.

As far as synergies are concerned, SocGen said the reality is different form the theory.

It noted management was confident on the potential level of synergies, pointing to at least £120m in year three.

However, SocGen said a big chunk (around 50%) is linked to additional revenues - new Argos concessions in Sainsbury's stores, clothing or leisure ranges from Sainsbury's at Argos - but by definition, customer behaviour is always difficult to predict.

“As such, visibility is limited. In a blue-sky scenario (£120m of synergies), we calculate the accretive impact on EPS would be around 12%, but it is too early to factor this into our model.”

SocGen said the deal would increase Sainsbury’s risk profile due to greater exposure to non-food and the threat of Amazon.

“Although we understand the rationale of the deal on a medium-term view (acceleration of the multi-channel strategy, rationalisation of selling space), the timing does not look appropriate to us, and the equity story has significantly changed.”

At 1112 GMT, Sainsbury’s shares were down 1.2% to 247.55p.