Homebase bought for £340m – what now for Argos?

Jan 18, 2016

DIY chain will be rebranded as Bunnings after buyout by Australian retail group

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Homebase has been acquired for £340m by Australian retail group Wesfarmers, potentially clearing the way for a buyout of stablemate Argos.

News of an initial bid from the antipodean suitor as long ago as last September was revealed by Homebase parent Home Retail Group (HRG) last week, in the latest twist to what has become a fascinating buyout saga. It followed the shock announcement by Sainsbury's earlier this month that it had made a takeover approach for the whole of HRG in November.

Sainsbury's has been open about the fact its interest is focused on HRG's catalogue retailer Argos, with which it already has a limited co-location deal. The main prize is Argos's impressive delivery service and online platform and the grocer is hoping a deal would enable it to save costs on high street rents and eventually expand to rival fast-growing online retailers such as Amazon.

In contrast, the buyout of Homebase is a more traditional attempt to gain a foothold in a new market. The Guardian says it gives Bunnings, Wesfarmer's garden centre chain, which is number one in Australia, a 265-store entrance into the UK market. After the rebrand, it will be the second largest home improvement retailer and have a platform from which to challenge market leader B&Q.

"Bunnings is well placed to unlock value from the Homebase business and has a proven track record in delivering growth, both organically and through acquisition," said Richard Goyder, managing director of Wesfarmers. "The £38bn UK home improvement and garden market is a large and growing market with strong fundamentals."

Following the sale, HRG will hand £200m of cash back to shareholders, notes the Daily Telegraph. Its shares soared three per cent this morning but by 10.45am, were down 0.4 per cent at 153p , although this remains more than 50 per cent up on its level before Sainsbury's confirmed its bid.

What will happen on this front remains the key question for shareholders now, ahead of a deadline for the supermarket group to confirm a formal offer by 2 February. Most reckon the defining factor will be the price, with The Sunday Times citing rival analysts at Redburn and Stifel giving an estimate of £1.2bn-£1.35bn to secure the rump of HRG.

Will Homebase sale clear Argos path for Sainsbury's?

14 January

The plot thickens with regard to the pursuit by Sainsbury's of Argos owner Home Retail Group (HRG).

Sainsbury's stunned the city at the beginning of last week by revealing, under pressure from the Takeover Panel, a secret bid back for the group in November that it will likely follow up.

Now HRG has this morning disclosed it is in advanced talks with Australian retail group Wesfarmers over a sale of another of its brands, Homebase, which originated from an approach made in September.

A potential sale of the garden centre chain - which The Guardian reports could be worth around £340m - complicates the picture, but could also "help clear the way for Sainsbury’s to buy Home Retail’s Argos chain".

Having offered a 22-slide presentation outlining the rationale for a buyout that concentrated solely on the catalogue retailer, it was widely assumed that Sainsbury's would have sold on Homebase in any case.

The main question now will be what the sale would do to the assumed price tag for HRG, which also owns Habitat, Schreiber and Hygena. Sainsbury's is thought to have bid around £1.1bn but some investors say the overall business is worth £1.6bn - or even more.

The news comes as HRG published Christmas period results that revealed Homebase sales had surged 5 per cent, but those at Argos had dipped 2.2 per cent. Sainsbury's might note, however, that successes in the latter's underlying figures include its online and same-day delivery offerings, both of which it has highlighted as key attractions for a buyout.

Online sales overtook in-store sales for the Black Friday discounting week, the Daily Telegraph notes, making up 62 per cent of sales and rising 10 per cent overall during the 18 weeks to 2 January. Since Argos launched its four-hour service in October, it has seen delivery orders surge 80 per cent.

HRG bosses said the company would finish with full-year earnings at the bottom end of the previously forecast £92m to £118m range. Shares in the company were down 1 per cent this morning to 147.9p, but still 50 per cent above where they were before the bid from Sainsbury's was disclosed.

How much might Sainsbury's have to pay for Argos owner?

11 January

"Big four" supermarket group Sainsbury's could make a revised offer for Argos's owner Home Retail Group (HRG) as soon as this week, the Sunday Times reports .

Britain's second-largest grocer "stunned" the City last week by confirming it had made a bid for HRG, which also owns Homebase, the garden-centre chain Sainsbury's originally offloaded 15 years' ago. The approach was made – and rejected – in November and came to light after HRG shares leapt last Wednesday, prompting the regulator to request publication of price-sensitive information.

Sainsbury's is said to have made an offer around HRG's closing share price on Friday of 138p, which would imply a valuation of £1.1bn. The latter's board did not even see fit to put the offer to shareholders – and several larger investors have said the group is in the middle of a transition that should yield a valuation of at least 200p, or £1.6bn.

Richard Buxton at Old Mutual Global Investors, a top ten shareholder in HRG, said: "If Argos can complete its transition in the next two years and get better margins on £4bn of sales, there’s a lot of upside. Sainsbury’s made the approach opportunistically after the October [profit] warning but this has got to start with a 'two' in front of it. We’ve gone through all the hard yards and pain."

Cato Stonex of Taube Hodson Stonex, a top 20 shareholder, said: "If they pay over 200p — perhaps 220p — they might get it." That price would value the company at around £1.8bn.

Sainsbury's sees much potential in a deal that would extend a trial arrangement in which it handed over space in ten supermarkets to Argos, to profitable effect. It is also interested in Argos's well-regarded four-hour delivery service and could extract value out of a break-up of HRG, including selling Homebase again, as well as stablemate Habitat.

However, it may face its own hurdles at the price levels being discussed. The Guardian reckons the largest shareholder in Sainsbury's, the Qatar Investment Authority, was angry at not being consulted over an approach and is resistant to any deal that would dilute its shareholding.

If a proposed buyout is worth in excess of a quarter of the total stock-market value of Sainsbury's shares – which, at the higher amounts being discussed, it would be – then the supermarket would need to seek shareholder approval.

It could also end up in a bidding war. Retail Gazette notes rumours that former Tesco boss Sir Terry Leahy is working with US private equity firm Clayton Dubilier & Rice on a rival bid, while other strategic investors such as UK-based buyout group Apax could also be interested.

Why would Sainsbury's bid £1bn+ for Argos owner?

06 January

Sainsbury's stunned the City yesterday with the news it had made a buyout approach for Argos and Homebase owner Home Retail Group (HRG).

The offer, which could have valued the target company at around £1bn based on its current market value, was made – and rejected – in November.

According to The Independent, Sainsbury's belated disclosure was triggered by the Takeover Panel reminding HRG of its "obligation to inform the stock market of any price-sensitive information" after shares rocketed. Eventually, the stock jumped more than 41 per cent.

The Independent adds the "matter… is likely to be investigated by the Financial Conduct Authority to ensure there was no insider dealing".

Analysts are more concerned, though, with the rationale for a deal that Clive Black, a retail analyst at Shore Capital, described as the "surprise of the year to date". Sainsbury's itself said in its statement that it thought a tie-up would create a "food and non-food retailer of choice". It now has until 2 February to make a formal offer under takeover rules and is "considering its position".

Writing in the Daily Telegraph, James Quinn was positive on the prospects of a successful bid for the supermarket group, which has already been outperforming its "big four" rivals in recent months. Through Argos, it would acquire "one of the most visited [online] retail portals in the UK", while it could double down on the margin-boosted deal it struck last year to fill spare supermarket store space with Argos outlets.

The Financial Times adds that Sainsbury's might be able to head off nascent competition from online giant Amazon in food delivery by utilising Argos's highly regarded four-hour delivery service. Analysts at RBC have already claimed this is more competitive than Amazon's as it is cheaper and covers substantially more products.

There are challenges in the deal, however. One is what to do with the other brands in the HRG portfolio, including Habitat and, particularly, Homebase. The garden centre chain has not generated stellar sales in recent years and was actually originally launched by Sainsbury's before it was sold for around £1bn in 2000. A deal could see the HRG stable broken up.

Other analysts point to the weak overall performance of HRG of late, which saw it issue a profit warning in October, as well as the upheaval in the supermarket sector. Many have therefore dismissed a potential deal as, in the words of Quinn, "two drunks propping one another up at a bar".

"It’s a deal done from a position of weakness - it’s one ailing high street business trying to buy another ailing high street business. It doesn’t make sense," said independent analyst Louise Cooper.

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