Is J Sainsbury (LSE: SBRY) going to snap up the Argos retail chain, currently owned by Home Retail (LSE: HOME)?
The supermarket firm has already made an indicative offer valued at around £1.3bn, but that was trumped by South African operator Steinhoff, which wants to gain a foothold in the UK general retail market. Both firms now have until 5pm on Friday 18 March to either make a formal offer or walk away, so will Sainsbury up its bid to £1.5bn as some are speculating?
Tuesday’s fourth-quarter update from Sainsbury didn’t really do anything for the share price, which has had an erratic-but-going-nowhere overall 12 months, though we have seen a 20% rise since 26 January, to 278p.
Price wars
And while the firm’s clothing and entertainment sales grew strongly, with online sales climbing too, cut-throat price wars in the groceries market helped keep like-for-like sales in the quarter to a mere 0.1% growth. Chief executive Mike Coupe was moved to say: “The market will remain competitive as food deflation continues to impact sales growth“. So are we looking at one struggler going after another in an attempt to make things better?
Sainsbury has pointed out that a combination of both chains would produce something bigger than either Amazon UK or John Lewis, but therein lies what I see as the biggest downside too. Neither Sainsbury nor Argos has the same moat that those two ‘best-in-market’ retailers arguably have.
Challenging the leaders
Amazon has a huge defensive position in its infrastructure, which it has been building in the UK since way before Sainsbury sold its first online banana and when Argos was all about paper catalogues, tiny pens, and a magic conveyor belt. And Argos is struggling to even make a dent in Amazon’s dominance. Meanwhile John Lewis has a reputation for customer service that is second to none. In fact, a picture of two dinosaurs springs to mind: “If we Tyrannosaurs merged with Apatosaurus, we’d be much bigger than those little mammals…“
The proposed takeover deal might be a good one for Home Retail shareholders as it will get them out of relying on their own struggling Argos business, though those who want out might well be advised to sell on the free market at 181p rather than hope for an offer that would beat it. If neither offer turns formal by the Friday deadline, we should expected a share price retreat.
Good for Sainsbury?
But when it comes to the interests of Sainsbury shareholders, I just don’t see the sense in it. Sainsbury needs to get its core business back in order, and its ongoing fall in earnings per share isn’t expected to turn around until the year to March 2018. This isn’t the time, in my view, for Sainsbury’s management to be taking its eye off that ball — especially not to focus it on a second-rate retailer in the hope of wooing those millions of online shoppers out there.
What would I do if I owned Sainsbury and Home Retail shares? I’d sell them both and seek out companies at the top of their game instead.