Argos deal set to make Sainsbury's top UK non-food retailer

Sainsbury’s game-changing £1.3bn takeover of Argos would catapult the supermarket to become the largest non-food retailer in the UK.

CEO Mike Coupe said the merger with Home Retail Group would create an “industry, if not world-leading” network, with general merchandise revenues of £6bn and more than 100,000 products in 2,000 Sainsbury’s and Argos stores. The combined group would leapfrog M&S, John Lewis and Dixons Carphone in terms of non-food sales.

Once the £200m proceeds from the Homebase sale are returned to HRG shareholders, Sainsbury’s cash-and-shares offer values the remaining business at £1.1bn - or, at 161.3p per share, a 63% premium to the Home Retail closing price on 4 January.

The HRG board has recommended the bid to its shareholders, who would own 12% of Sainsbury’s if the deal completes, with Old Mutual already coming out in favour.

Coupe, who has been trialling Argos concessions in 10 stores since last summer, said the takeover would allow British consumers to shop “whenever and wherever” they want. “Our customers want us to offer more choice and for that choice to be faster than ever, driven by the rise of mobile phone and digital technology,” he added. “It will enhance both businesses in the way customers respond.”

Sainsbury’s expects to find savings and revenue gains of at least £120m a year by 2019 by moving Argos stores into its supermarkets when leases expire, as well as opening new concessions at all of its larger sites.

Other synergies would come from increased buying power and the sale of Sainsbury’s non-food offering of clothing, homeware and seasonal and leisure ranges through the Argos network, as well as a wider range of electronics, appliances and toys.

“What Argos is doing online is better and more complicated than anyone else in the UK, including Amazon. They are a formidable logistics business,” Hedley Aylott, CEO and founder of online retail specialist Summit.

The jewel in the crown for Coupe is the ability to deliver customer orders to any of Sainsbury’s cstores within four hours.

Hedley Aylott, CEO and founder of online retail specialist Summit, which has worked with Argos on e-commerce for the past eight years, said the deal would “virtually overnight” put Sainsbury’s “easily” three years ahead of its peers in terms of multichannel retailing. “They’ll suddenly be best in class,” he added.

“What Argos is doing online is better and more complicated than anyone else in the UK, including Amazon. They are a formidable logistics business. That’s how they’ve been able to hold their own against Amazon – they may not always be cheaper, but they are quicker. Argos have invested £300m in ecommerce over the past three years, so Sainsbury’s will inherit incredible capabilities in terms of technology, talent and logistics.”

Aylott said: ”Argos have emerged from being a catalogue business to being real power player in ecommerce. They’ve just had their best year of online sales ever. The transformation under John Walden has been immense. The capabilities Argos has are eminently suitable to food. They could help boost availability and stock management across stores. Plus, of course, they will improve ease of purchase for Sainsbury’s non food and extend more of the non-food range to stores.”

He added that Argos was also ahead on mobile having just hit more than £1bn in mobile sales. “That gives you invaluable learnings about how to do ecommerce across different platforms and devices, and really futureproofs Sainsbury’s.”

The City was impressed with the financial wizardry shown by CFO John Rogers - the deal includes £250m cash on the HRG balance sheet and the £600m Argos loan book will be added to Sainsbury’s bank - but many were lukewarm on the business case.

“There is more risk and uncertainty around this bid for Home Retail than management admits,” David McCarthy at HSBC.

Société Générale downgraded Sainsbury’s from a ‘buy’ to ‘hold’ this week, HSBC was “unconvinced” and Shore Capital felt “genuinely torn”.

Aside from the £140m Sainsbury’s will have to invest over three years as it adds new concessions into its estate, analysts were concerned Coupe may be distracted from the core food business.

Closing and integrating hundreds of new outlets into supermarkets in the hope customers would follow was also risky, SocGén said. “Management appeared very confident on the potential level of synergies,” the broker not added. “However, a big proportion (50%, we estimate) is linked to additional revenues (new Argos concessions in Sainsbury’s stores, clothing or leisure ranges from Sainsbury’s at Argos), but by definition, customer behaviour is always difficult to predict.”

David McCarthy at HSBC added the combination of two “challenged” retailers would not solve the strategic problems of Sainsbury’s. “We believe there is more risk and uncertainty around this bid for Home Retail than management admits,” he said. “We are unconvinced an Argos in several hundred Sainsbury stores will be a winner (we would not put an Argos in a Waitrose), that sales synergies will come through as hoped or that the overlap between the different customer base is as high as the company suggests when we only consider core customers.”

The supermarket has three weeks to complete its due diligence and seal the transaction before the new takeover deadline of 23 February.