J Sainsbury Plc agreed to buy Home Retail Group Plc for about £1.3 billion ($1.9 billion), handing the British supermarket chain control over hundreds of shops selling everything from jewellery to televisions, as it grapples with the encroachment of online retailers.
Sainsbury will pay about 161.3 pence in cash and stock per Home Retail share, a 63-per-cent premium above the closing price prior to the emergence of discussions. The deal will boost earnings per share in the first full year, and lead to profit synergies of at least £120 million in the third year, Sainsbury said in a recent statement. The retailers also extended the UK regulatory deadline for a formal offer to 23 February.
“The numbers stack up well, and we continue to think that the commercial logic of the deal is sound from both defensive and offensive senses,” said James Collins, an analyst at Stifel.
The acquisition would be Sainsbury’s biggest, giving it more than 800 Argos stores and a vastly expanded product delivery network. The grocer is seeking to fight back in a market beset by discount competition, where efficient distribution is crucial to winning over shoppers who want to order online. The deal’s value also includes £200 million realised by the sale of Home Retail’s Homebase chain to Australia’s Wesfarmers last month.
The price "is a fair compromise between the two parties," Jefferies analyst James Grzinic said in a note, adding that the mix of cash and stock is “sensible”. Home Retail shares fell as much as 3.5 per cent in early London trading.
Buying Home Retail will help Sainsbury to make better use of unproductive store space. Last year, the grocer introduced Argos outlets in its supermarkets, and about half of the deal’s profit benefits will be achieved by closing Argos stores and relocating them as concessions in Sainsbury’s supermarkets. Sainsbury expects to incur one-time costs of about £140 million to achieve the synergies, and also expects to spend an additional £140 million refurbishing stores with Argos concessions.
The synergy goals "seem reasonable", according to Charles Allen, an analyst at Bloomberg Intelligence.
By moving further into product categories including jewellery, televisions and furniture, Sainsbury risks straying further onto the radar of Amazon.com, Inc. It already faces stiff competition in its main grocery business from discounters Aldi and Lidl.
The proposed deal would lead to a full break-up of Home Retail, the board of which has said that it is willing to recommend the deal. Its shareholders will own about 12 per cent of the combined company. Home Retail was formed in 2006, when Argos, home-improvement chain Homebase and a financial-services business were spun off from GUS Plc. The company agreed to sell Homebase to Wesfarmers for £340 million in January, simplifying Sainsbury’s effort to gain control of Argos.
Sainsbury’s bid comprises 0.321 new shares and 55 pence in cash for each Home Retail share. The grocer made an initial approach in November that was rejected, and negotiations stalled in late January over the price, four people familiar with the matter previously told Bloomberg News.
Morgan Stanley & Co. and UBS Group AG are advising Sainsbury. Bank of America Merrill Lynch is advising Home Retail.
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