£1.3bn sale of Argos to Sainsbury’s advances to next stage

Argos owner Home Retail Group has accepted that a £1.3bn offer would be agreeable should supermarket giant Sainsbury’s wish to buy the retailer.

While no such offer has yet been made, the proposal of a shares and cash deal which as of January 4 represented a 63% premium on Home Retail Group’s share price, will no doubt move negotiations between the two retailers onwards.

Under the proposal Home Retail Group shareholders will own 12% of the combined group.

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Details of the negotiations released by J Sainsbury state that any deal would represent “an attractive proposition for the customers and shareholders of both companies, establishing a platform for long-term value creation. The combination is an opportunity to bring together two of the UK’s leading retail businesses, with complementary product offers, focused on delivering quality products and services at fair prices, through an integrated, multi-channel proposition”.

Specifically the details state that a new group would achieve growth and cost savings through combined use of retail locations, digital and delivery network across both food and non-food items.

This would result in certain Argos stores being replaced by concessions within Sainbury’s stores and the removal of duplicate or overlapping central and support functions as well as procurement benefits resulting from the new group’s enhanced scale. Sainsbury’s clothing, homewares and seasonal and leisure ranges would also be offered through Argos.

The new group would also expand its financial services remit, offering credit cards, loans, deposits, insurance and ATMs.

Bringing the two companies together in this manner is expected to require an investment of £140m split over the first three years with a further £140m necessary in store fit-out costs.

J Sainbury believes the offer would grow its earnings per share within the first year of acquisition and offer double digital earnings per share within three years and a “low to mid-teens return on invested capital” worth £120m in gross earnings.

Any offer by J Sainsbury is expected to be based on the impending £340m sale of Home Retail Group’s Homebase business to Australian retail giant Wesfarmer. To allow for due diligence, Home Retail Group and J Sainsbury have extended their deadline by three weeks to February 23 by which time J Sainsbury will either have to make a formal offer or withdraw from the process.

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