Potential acquisition comes as a surprise.
Sainsbury’s announced yesterday that it made an offer to the board of HomeRetail Group plc in November, in the form of Sainsbury’s shares and cash. The
offer has been rejected and Sainsbury’s is now considering its position. It has
until 2nd Feb to make another offer.
What is Home Retail Group?
Home Retail Group is a £5.8bn of sales UK retailer, consisting of two banners.
Argos, a catalogue and online general merchandise retailer with >800 stores,
accounts for £4.2bn of sales and the majority of the group’s c.£100m of EBIT.
Homebase is a £1.5bn DIY retailer with 260 stores. Financial services accounts
for c.£150m sales and just under £10m of EBIT.
We actually like the idea…
Our view is that food retail margins will remain slim. Hence, we see a
combination of retail businesses with real synergy potential as worth exploring.
Sainsbury’s statement mentions opportunities in multi-channel, financial
services and the ability to become the retailer of choice for food and non-food.
Three areas of cost synergies are identified 1) property rationalization (rents) 2)
scale (purchasing) and 3) operational efficiencies (central costs).
…and the numbers look okay.
Home’s share price closed today at 139p. We expect any further offer to be at
a meaningful premium to this, hence we assume a min. 25% premium,
implying a 175p per share offer. Assuming a 50% equity/cash mix and our
midpoint view of c.£125m of synergies, we think this deal would be broadly
neutral to Sainsbury’s financial leverage (adj. net debt/EBITDAR at c.4x) and
c.20% accretive to EPS.
Re-arranging the boxes is inevitable and Sainsbury’s have expertise.
Ultimately, we think optimizing and rationalizing store portfolios is inevitable in
both grocery and non-food and Sainsbury’s experienced management team is
well equipped for the task. However, the time and effort being directed at
such a major undertaking would need to be well rewarded, given the risk.
Reiterate Hold on balanced risk/ reward-Valuation and Risks.
We base our 265p PT on a DCF, using a normalised 2.2% EBIT margin, 2.8%
capex/sales, a terminal growth rate of 0% and a WACC of 6.0%. Upside risks
include a property-based bid, food inflation, more cost cutting or less price
investment than expected. Downside risks include deterioration in profit than
expected due to negative operating leverage or price investment.