It is by no means a stretch to say that it is largely property folk who truly get why J Sainsbury is so keen to take over Argos. After all, much of the grocer’s £1.1bn possible offer for Home Retail Group, the parent of Argos, is about driving synergies from the combination of their real estate portfolios.
A sizeable proportion, 55% to be exact, of the 755 Argos stores are on leases that will expire on a phased basis between now and 2020. Sainsbury’s has also, no doubt, drawn up a hit list of Argos stores to close if the deal completes, which will drive further savings.
The supermarket group’s potential real estate efficiencies became easier too, once Home Retail Group had helpfully sold its Homebase DIY chain to Aussie chain Wesfarmers for £340m last month.
In one fell swoop, £1.4bn of gross lease liabilities were offloaded to the Australians, leaving Home Retail Group with lease-adjusted net debt of just £13m, compared with £1.5bn before the sale.
The sale left Sainsbury’s –which didn’t care anyway for a DIY chain it used to own more than a decade ago – free to focus on its real target: Argos.
Sainsbury’s recommended offer comprises a mix of 0.32 Sainsbury’s shares and 55p in cash for each Home Retail Group share.
Investors in Home Retail Group will also receive a payout of 25p a share, which largely reflects the £200m return from the Homebase sale, and a 2.8p final dividend.
Together, the Sainsbury’s offer and the Homebase capital return equates to 161.3p a share, valuing the share capital of Home Retail Group at £1.3bn, which reflects a 63% premium.
Much of the fraught nature of the negotiations was a result of haggling over price and there is no doubt some of Home Retail Group’s shareholders – such as Old Mutual, which has been very vocal in its views – may be disappointed that Sainsbury’s has not had to stump up more.
There is, however, probably enough cash in the offer to win over most Home Retail Group investors, who will own about 12% of an enlarged group whose scale will rival companies such as John Lewis.
Now that Sainsbury’s has “put up” and showed its hand, so to speak, the real question remains whether its takeover of the struggling Argos makes sense both now and in the future.
It is an aggressive move, which many think points more to the pressures Sainsbury’s is operating under than any truly inspired strategic logic.
This week, Sainsbury’s, which was previously coy about detailing the exact synergies it hoped to make before agreeing a recommended deal, said it expected to make £120m of synergies – half of which will come from the real estate portfolio. The rest will come from other operational improvements.
Sainsbury’s seems confident that in-store Argos concessions will only encourage further sales and footfall at a time when the grocery sector is buckling from a prolonged and vicious price war with the discounters.
By combining Sainsbury’s’ and Argos’s buying power and cross-selling to the surprisingly large overlap of shoppers between the two, there potentially could be even further gains to be made.
But analysts remain torn on the issue, pointing out that Argos is beset with structural challenges, is in the midst of a turnaround and is operating in a sector where it is still being beaten by rivals Amazon, John Lewis and others.
Clive Black, the veteran retail analyst, says he is “intrigued and concerned if the real estate prize can be achieved in a profitable manner for Sainsbury’s”.
While no one disputes that some Argos stores will shut, does that mean those shoppers will head to their nearest Sainbury’s store? There is a risk this business could go elsewhere while non-Sainsbury’s shoppers may also continue to shop elsewhere.
The outcome remains to be seen and there will be immense pressure on Mike Coupe, the chief executive of Sainsbury’s, to make this takeover work.
As Black says, many fear Sainsbury’s could well be buying a challenged business where “solutions do not appear to be a matter of just lifting a package from a shelf”.
Deirdre Hipwell is retail and M&A correspondent for The Times
