Sainsbury’s £1.3bn offer for Argos parent, Home Retail Group, could be a brave and decisive move – allowing the retailer to diversify its appeal, repurpose its store space and simplify its own offering, according to analysts.
However, they also question the retailers’ diverse businesses and lack of a significant overlap between the two companies customer bases.
Jon Copestake, retail analyst at The Economist Intelligence Unit, said: “In the medium term this would create two retailers under one roof, one focusing on non-food and the other on groceries. If the £120m per year in cost saving synergies touted by Sainsbury’s are accurate (or conservative as the retailer claims) then the deal will effectively have paid for itself in little more than a decade.
“However, there is a flip side to this. Argos has developed a strong multichannel offering but not one that necessarily lends itself to grocery delivery and the two retail subsectors are fairly divergent. Additionally, competition from Amazon remains strong and is expanding quickly while discount retailers, another significant market challenger to Sainsbury‘s, are thriving precisely because they are keeping things simple by focusing on what they do best. Rather than creating a new avenue for sales Sainsbury‘s may find that it is simply opening itself up to a new front of competition.”
Nicla Di Palma, equity analyst at Brewin Dolphin, said she remained unconvinced about the industrial logic of the deal and continues to believe that there is not a significant overlap amongst Sainsbury’s and Home Retail Group customers.
“However, looking at the deal another way, Sainsbury’s is buying about 800 Argos stores for about £1.5m each which seems a fair price,” she said. “The problem is that this is not simply a purchase of a large number of stores, but will incur integration risks.”
The deadline for a firm offer has been extended to 23 February.
“We would not be buying Sainsbury shares today although it seems that the market has given it the benefit of the doubt at this point,” said Di Palma. “The transaction is likely to complete at the end of Q2/beginning of Q3 although it will take much longer to know whether the deal is a success. “