* Sainsbury plc has stated that it made an offer for Home Retail Group
(HOME.L; £1.25; 2) in November 2015 – The offer comprised shares and cash but
has not been quantified. The initial approach was rejected by Home Retail Group’s
Board of Directors and Sainsbury now has until 2 February 2016 to announce either
a firm intention to make an offer or that it does not intend to make an offer.
* Rationale - Sainsbury’s has stated that it believes the combination of Home Retail
group and Sainsbury’s is an opportunity to bring together two of the UK’s leading
retail businesses to create an attractive proposition for both customers and
shareholders. The Board of Sainsbury’s believes the combination will, amongst
other things: create choice for customers, deliver profitable sales growth, bring
together multi-channel capabilities and delivery networks, optimise use of combined
retail space, deliver revenue and cost synergies. There has as yet been no
response from Home Retail.
* Our view - Whilst our view will be contingent on the price of any subsequent M&A
and the synergies from the combined business plan we would adopt a cautious
stance with regard to JS acquiring Home. Specifically, 1) Whilst Sainsbury has
performed relatively well the backdrop for UK food retail remains challenging as the
industry seeks to slow the advance of the discounters. We think JS's shareholders
might be better served by focusing management's time on the task in hand. 2) JS
already has a strong non-food offer. The rationale for acquiring an electricals
focused retailer in Argos and DIY in Homebase is not clear, in our view. 3) JS has
acknowledged that it is overspaced. Whilst we applaud JS's use of Argos
concessions, the deal would acquire yet more space. In short it is not clear why JS
needs to buy the whole of Home to leverage Argos's brand, buying scale, category
expertise or delivery assets.
* View from Citi General Retail Team - Given the low valuation of Home Retail
Group (it was trading at c5.0x 2016E EV/EBIT, almost a 50% discount to the
general retail sector) we are unsurprised at the quantum of the share price move
(+32%) today. The rationale however seems to focus around leveraging the c750
Argos stores in the UK where the average lease length is still 5 years and its owned
home delivery network with nationwide coverage. However it is difficult to see how
this could be leveraged cost effectively to fulfil both grocery and non-food at scale
together. Additionally question marks would exist on where this would leave the
Homebase business given the large level of buying synergies which exist between
the two divisions. With the shares now trading at an EV/EBIT of 8.2x it could be
harder for Sainsbury to justify paying such a premium when it is already benefiting
from Argos concessions and has a decent non-food offer (note that c50% of Argos
sales are electricals).