Steinhoff International, the South African furniture retailer, has bowed out of the bidding war on Friday giving Sainsbury’s the right to acquire Home Retail International through its cash and shares offer.
Home Retail is owned by Argos the catalogue retailer, as well as Habitat, a household furnishing retailer.
Sainsbury’s is now awaiting the recommendation from Home Retail’s board of directors. Sainsbury’s Chief Executive, Mike Coupe, is confident it will be granted to them saying:
“You can see from the wording of the statement that it’s pointing in the right direction.”
Steinhoff International stopped its pursuit of Home Retail and revealed that it would instead purchase Darty, an electrical goods retailer, for £ 673 million. Steinhoff, which also owns Bensons Beds and Harveys, explained that despite Home Retail being a very attractive business, due diligence revealed that it is not up to their investment criteria.
Steinhoff had made an offer for Home Retail in February this year for £1.4 billion with Sainsbury’s earlier bid at £1.3 billion.
Analysts predicted that the bidding war could lead to a £1.5 billion sale price, steering Home Retail’s stock price up by 80 per cent, however after Steinhoff’s announcement Home Retail’s stock closed at 163.2 pence, down by nearly 10 per cent. The resulting bid after Steinhoff’s pull out is at a firm 173.2 pence per share.
Sainsbury’s expects to capitalise on synergies as it acquires the Home Retail brand. It has already engaged in a successful co-location trial for ten stores with Argos. Half of the leases of more than 700 Argos stores that will expire in the coming years, Sainsbury’s plans to move most of these stores near one of their own. More synergies are expected to be harvested and estimated to reach up to £160 million by the third year.
Sainsbury’s also wants to tap into Argos’ experience in online retailing and make use of its established delivery system.
Competition in UK’s big four supermarkets is already very intense and the environmental threats are making the trading sphere any easier. Discounted retailers and convenience stores have been appearing throughout the country and winning over consumers, whose preferences seem to have shifted from a once a week big shopping spree to a buy as needed behaviour. This makes the strategy of selling bulk items at a discount not as an attractive offer as it once was.
Also causing headwinds are the online shops and delivery systems that are now in place, as Amazon launched its Pantry service in the UK in November last year. Analysts speculate that Amazon would probably go into a full grocery service in the future which would translate to a huge threat for traditional supermarkets. Amazon already offers fresh food products in the US.
The online area is where Sainsbury’s hopes Argos will contribute the most. Although known commonly for its catalogue shopping experience, Argos had announced a strategic move to transform itself to a digital retailer in 2012. Its delivery chain allows it to dispatch orders by 10 PM daily, so long as requests were placed before 6 PM.
“We believe it creates a multi-product, multi-channel proposition with fast delivery networks that will be very attractive for all our customers.”