Steinhoff joins Sainsbury's in race for Argos: What the analysts say

“Sainsbury’s bid for Home Retail Group has been possibly derailed by a higher and, significantly, a cash offer from European listed Steinhoff, which has a retail presence in the UK through Bensons for Beds and Harvey’s.

“A counter bid does not come as a surprise to us as Sainsbury’s own bid, which was significantly equity based, effectively put the Argos business in-play.

“Indeed, while there are no signs of activity, we felt that Asda should have dusted off the Argos file with the business on the market.

“Quite what Sainsbury’s will do here now remains to be seen. The deadline for the proposed bid for Home Retail Group was Tuesday February 23, although in light of the competing offer, the company may ask for this to be extended. ‎

“Sainsbury’s has been very opportunistic, creative and entrepreneurial with its bid for Home Retail Group to our minds, including the utilisation of the debtor book and the combination with Sainsbury’s Bank.

“However, Sainsbury’s management has also repeatedly stated that it will not overpay for the Argos business.” – Clive Black, Shore Capital

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“Given Steinhoff already has 50 Pep & Co discount clothing and children stores in the UK and more than 283 Conforama household stores across Europe, we might assume that more of the Argos stores will be converted into Pep & Co clothing stores.

“This process could mean a reconfiguration of Argos categories and new lower pricing impacting the current UK clothing and electrical markets, as well as expanding their market share of discount clothing and childrenswear.

“We believe that losing out to Steinhoff may be a blessing in disguise for Sainsbury’s shareholders”

Mike Dennis, Cantor Fitzgerald

“This, in our view, is not good for Mothercare and ABF’s Primark.

“We believe that losing out to Steinhoff may be a blessing in disguise for Sainsbury’s shareholders.

“Our initial work on Argos uncovered several issues. We understand that the 10 Argos inserts in Sainsbury’s are a lot less promising than the last 70 inserts put into Homebase, at a cost of £200,000 each, which brings into question whether Argos sales and profitability would grow under the Sainsbury’s banner and control.

“The hub-and-spoke fulfilment model has not been as successful as the consultants or Argos had first hoped. The idea back in 2012 was that cost per delivery to home would be halved but we believe it is now similar to the original cost of distribution from Argos’s Castleford depot.

“Sainsbury’s management will need to consider its options without Argos and also convince shareholders that there are other non-food opportunities or a better outlook for their food operations in the current challenging grocery market.” – Mike Dennis, Cantor Fitzgerald

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“This is quite 11th hour – Sainsbury’s has until February 23 at 5pm to confirm whether or not it will make a bid under the Takeover Code, unless a later date and time is agreed by the panel. Home Retail’s board has stated it is reviewing the Steinhoff proposal, which would have until March 18 to announce a firm intention.

“Steinhoff certainly look like a serious bidder; it is the second largest furniture company in the world and it has been on a rapid M&A-led growth path in Europe. In the UK it already owns Bensons for Beds and Harveys. Buying Argos would enable it to expand its only distribution capabilities.

“Sainsbury’s might be keen to avoid a bidding war, but we would expect them to match the Steinhoff bid, and hope that the fact they are further down the line on due diligence will mean the board will accept their offer”

Bruno Monteyne, Bernstein

“Sainsbury’s has effectively questioned the rationale of “standalone food retail” and it needed this extra non-food capability to strive (being multi-product, multi-services, multichannel).

“Pulling away from the deal would leave an important strategic question mark of how they plan to fill that gap. They could build their own non-food supply chain (like Tesco did half a decade ago) or look for something else.

“Sainsbury’s might be keen to avoid a bidding war, but we would expect them to match the Steinhoff bid, and hope that the fact they are further down the line on due diligence will mean the board will accept their offer.” – Bruno Monteyne, Bernstein

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“We think the commercial benefits of a Sainsbury’s/Argos combination offer Home Retail Group shareholders substantially more upside in the longer term than Steinhoff’s potential 175p per share offer. The numbers are also sufficiently compelling, in our view, to justify Sainsbury’s increasing its offer.

“However, we think Sainsbury’s risks being outgunned by Steinhoff. Partnering with Sainsbury’s would, in our view, deliver a stronger retail proposition for Argos than would be the case with Steinhoff, but Steinhoff’s non-food scale and, crucially, vertical integration, could bring very substantial synergies.” – James Collins, Stifel