Sainsbury’s surprise manoeuvre

Sainsbury's
Angus McCrone By Angus McCrone, CA magazine

18 March 2016

Gone are the colourful characters of yesteryear, but there’s plenty to surprise in the Home Retail Group takeover tussle, says Angus McCrone.

Ever feel nostalgic for the golden age of takeover battles, when rival bidders blasted each other and the target company in the national press – and practitioners were colourful enough to be the basis of movie characters such as Gordon Gekko and Sir Larry Wildman in Wall Street or Edward Lewis in Pretty Woman?

Echoes of those days are relatively rare in the wiser (and sadder) City of the second decade of the 21st century; and, when they do come, they tend to be at a lower pitch and a lower volume.

The early part of 2016 gave rise to one such tussle in the shape of the rival bids for Home Retail Group, owner of Argos. Neither of the bosses of the would-be bidders – Mike Coupe, chief executive of J Sainsbury, and Markus Jooste, chief executive of Steinhoff International – is likely to be the inspiration for future Hollywood characters.

However, the opening shots of this skirmish did highlight some features of the contemporary bid scene that would surprise those lions of the 1980s and 1990s.

The “possible offer” from Sainsbury’s, unveiled on 2 February and recommended by the Home Retail Group board, involved a mix of 0.321 shares of the bidder plus 55p in cash for every share in Home Retail Group. This equated to £1.1bn at the prevailing Sainsbury’s stock price.

The riposte by South African-based but German-listed Steinhoff, announced on 19 February, was for 147.2p in cash. Both this and the Sainsbury’s package added, on top of the basic deal, the expected 25p-a-share cash payout to Home Retail Group equity holders from the already-announced sale of DIY outlet Homebase for £340m to Australian conglomerate Wesfarmers.

So what about those contemporary features?

Well, for a start, both takeover approaches contained riders allowing the bidders to make a lower offer than the one outlined, in certain circumstances. In the past, there was only one way bids could go after the original gambit (and that was up), unless a period of several months elapsed, or the Takeover Panel freed the aggressor to bid lower for some specific reason.

A second noticeable aspect of the bids was that neither was preceded by a “dawn raid” on the target’s shares. In earlier times, snapping up a 5 per cent or 10 per cent holding in the markets prior to announcing a full bid at the same, or slightly higher, price was a standard tactic to show intent and put pressure on the target’s board. Nowadays, there may be more fear of tying up cash in a stranded shareholding if the bid fails.

A third was the fat premium to the previous share price, more swollen than most bidders would have considered offering in the past. As I have noted in this column before, obtaining a board recommendation is expensive now. Sainsbury’s put an effective 161.3p-a-share on the table, compared to the HRG price before the first statement of interest on 4 January, of just 98p.

Fourth, there was the amount of detail given on merger benefits, or “synergies”, of the part-paper offer (that by Sainsbury’s). These were estimated at £120m in the third full year after the takeover, and would result from moving Argos concessions into Sainsbury’s stores, freeing up retail space to be sold and creating cross-selling opportunities in supermarkets. In addition, there were the usual savings in head office and procurement expenses.

'Dis-synergies'

Refreshingly, Sainsbury’s also owned up to possible “dis-synergies” in its initial statement. These were identified as “potential cannibalisation of Argos store revenue (where an existing standalone Argos store is in the vicinity of a newly established Argos concession store within a Sainsbury’s supermarket)”.

Less refreshingly, the well-known takeover “dis-synergy” of overloaded managements struggling to deal with two companies, and the problems of integration and culture clash, was not mentioned, at least in that 2 February document. Steinhoff, which also announced in February a £662m approach for London-listed white goods retailer Darty, seemed prepared to face a double dose of this challenge.

With its bid for Home Retail Group, Sainsbury’s also appeared to have a joker in its hand; a plan to refinance the debt it takes on by attracting more retail deposits to its own Sainsbury’s Bank, to offset the acquired consumer loan book of Argos. I doubt any of the takeover kings of the 1980s or 1990s thought of that manoeuvre.

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