Sainsbury's agrees $1.87B deal for Home Retail

CNBC and Reuters
Sainsbury’s looks to boost online business

Sainsbury's, Britain's second-largest supermarket chain, announced on Tuesday it had agreed a £1.3 billion ($1.87 billion) deal to buy Argos-owner Home Retail in cash and shares.

In an attempt to expand its product range and put itself at the forefront of British retail, Sainsbury's hopes the deal will boost its online presence and see annual savings and benefits of £120 million in the third year after completion.

The U.K.'s retail sector has come under pressure in recent years, as online competitors and cheaper retailers from overseas, like Germany's Lidl and Aldi, become more prominent in the market.

Having rejected an earlier undisclosed offer from the food retailer in January, Home Retail said it was now willing to recommend the offer which, including a proposed capital return, implied a value of around 161.3 pence per Home Retail share. The deadline for Sainsbury's to make a firm offer has been extended to 23rd February.

Retail's big advantage over Amazon isn't foolproof

Looking at the long-term effects of the deal, shareholders of Home Retail would be "pretty grateful", however, this would be a "poor deal" for Sainsbury's shareholders, Tony Shiret, senior analyst in food and retail at Haitong Securities, told CNBC Tuesday.

"I don't think Argos, which is what (Sainsbury's) bought, is a bad business; it's just not a very good business to buy because it's in a very competitively disadvantaged part of the market, which is sort of a head-on with Amazon in a lot of sectors."

"So, commercially long-term, I think it's sort of a poor deal for Sainsbury's shareholders, even though it's being dressed up as good in the short term," Shiret said.

Customers push shopping carts as they look for goods inside a Sainsbury's supermarket store.
Chris Ratcliffe/Bloomberg via Getty Images

In January, Home Retail reported that like-for-like sales at its biggest chain Argos had seen a 2.2 percent drop, adding that traditional store walk-in sales had dipped 13 percent during Argos' Christmas month, December, while digital sales had increased by 10 percent.

Sainsbury's will have to accept that Amazon will be "an aggressive competitor" in their non-food business, however, there are some things Sainsbury can learn from Argos and its owner Home Retail, Shiret adds.

"They will get some benefits from Argos' knowledge within the market, but those will be offset by the competitive pressure they'll put on themselves by this move."

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As a way of diversifying itself away from food sales, Sainsbury's hopes the deal will create a food and non-food retailer of choice within the British market, while offering an satisfactory combination of range, speed and location through its presence and multi-channel availability.

Nicla Di Palma, equity analyst at Brewin Dolphin, said in a note Tuesday that her company remains "unconvinced about the industrial logic and continue(s) to believe that there is not a significant overlap amongst Sainsbury and Home Retail customers."

London-listed Sainsbury's shares however reacted positively to the news, up as much as 3 percent in morning trade before paring gains, while Home Retail fluctuated around the flatline.

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