Analysis: Would it make sense for Tesco to buy Mothercare?

Tesco chief executive Philip Clarke has frequently made surprising decisions during his tenure at the top of the UK’s largest retailer. In ousting UK boss Richard Brasher, reducing its exposure to the Chinese market and acquiring restaurant chain Giraffe, Clarke has not been afraid to make bold decisions.

But an acquisition of Mothercare would raise the bar. It has been reported Tesco considered an acquisition six months ago but the plan has been put on hold. City insiders say the recent slump in Mothercare’s share price could rekindle Tesco’s plan but the grocer, which has not commented on the news reports, has not made a second approach, it is understood.

The possibility of a deal to acquire a struggling, largely store-based general merchandise retailer would appear unlikely given that Tesco’s core problems are its large store base and, well, general merchandise. In its Christmas trading update, Tesco said shoppers had migrated online for non-food products more quickly than anticipated.

Mothercare’s share price – which has risen 4% this morning on news of a potential Tesco deal – remains at a low following a profit warning after a difficult Christmas. However, with the retailer still likely to have to shut a tranche of high street stores as sales migrate online in the near future, would Tesco really take on a troubled case at a delicate time for its under pressure UK arm?

Cantor Fitzgerald analyst Mike Dennis, who believes Tesco should not make the proposed acquisition, says: “Any acquirer of Mothercare would need to bid significantly below the current share price to offset any liabilities and loss of sales from closing stores and duplication of lines. We already see a risk that Tesco’s 2014 trading profits could come in at the bottom end of the current range £3.1bn-£3.4bn and that a deal like Mothercare is, at current levels, value impairing.”

Far more likely is that the grocer may look to tie-up with Mothercare to use the brand, and its sister fascia Early Learning Centre, within its hypermarket stores. With Giraffe, café Harris + Hoole, restaurant Decks, The Original Factory Shop and potentially Sports Direct all among Tesco’s arsenal to fill big box stores, Mothercare may provide another viable option as a brand with strong heritage.

Shore Capital analyst Clive Black says: “We would not be surprised to see Tesco associated with other potential tie-ups in the future as the retailer goes through the gears of making its large store estate more interesting as destination centres.

“However, it remains our view that a spree of acquisitions of general retailers, particularly store based ones, in a multi-channel age, does not remain our central expectation, noting the scope for opportunism to always potentially feature in business.”

A potential tie-up would not represent the first time Tesco has attempted to buy its way into the rapidly growing baby goods market. In 2011, the grocer lost out to Morrisons in bidding for baby etailer Kiddicare and has since launched its Tesco Baby brand.

However, the market has moved rapidly in recent years and online players have worked hard to charm mothers into the etail landscape.

Tesco could yet become a friendly sibling to Mothercare in a shop-in-shop tie up, but the chances of the grocer becoming its parent appear unlikely.