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Home Retail soars as Sainsbury's reveals rejected bid
Shares in Argos owner surge 40% as supermarket says it is 'considering its position' after takeover bid was rejected.
Update: Shares in Home Retail Group have soared after Sainsbury's revealed the Argos owner had rejected a takeover bid.
The supermarket said it was 'considering its position' after the cash-and-shares bid, made in November last year, was shunned. Shares in Home Retail (HOME) surged 41% to 139.3p while Sainsbury's (SBRY) dipped 5.2% to 242.1p.
Sainsbury's bid follows of a year of the two companies working together, with Argos products being offered in the supermarket's stores.
'The board of Sainsbury's believes the combination of Sainsbury's and Home Retail Group is an attractive proposition for the customers and shareholders of both companies, establishing a platform for longer-term value creation,' said the supermarket in a statement to the market.
Sainsbury's said the takeover would create revenue synergies 'through the ability to sell to each other's customers, including the operation of Argos concessions within Sainsbury's stores, and the sale of Sainsbury's products and services through Argos's network'.
The supermarket added that a deal would also create cost-cutting potential 'through property rationalisation, scale benefits and operational efficiencies'.
Home Retail said in a statement that its board had rejected the approach as it 'undervalued Home Retail group and its long-term prospects'.
Sainsbury's springs surprise
Sainsbury's bid for the group has come as a surprise, as the supermarket, which reported its first annual loss in a decade last year, struggles to contend with the threat posed by discount retailers Aldi and Lidl.
Last year it cut its final dividend to 8.2p from 12.3p per share the previous year to shore up its balance sheet. Like rivals Tesco (TSCO) and Morrisons (MRW), its shares have endured a spectacular fall from grace over the last two years, losing more than a third of their value.
But recent news has been more promising. Figures from market researcher Kanter Worldpanel last month suggested Sainsbury's was coping with the discounters' threat better than its rivals.
A successful takeover would also reunite Sainsbury's with Homebase the DIY retailer it sold to Home Retail predecessor GUS in 2000.
While the identity of Home Retail's suitor may have surprised investors, the group has long been the subject of takeover speculation. Private equity groups have been tipped to acquire the Argos owner, while the Financial Times last month suggested the group could offload Homebase.
News of the bid will likely please Schroder Income managers Kevin Murphy and Nick Kirrage, the biggest fund investors in Home Retail, according to Reuters data. Schroder Income Maximiser manager Thomas See is also a major backer.
Analysts were scathing over the move. Tony Shiret of Haitong Research said the deal made 'no strategic business sense'.
'This type of acquisition will not solve either side's competition related problems,' he said. 'After any initial scale benefits would the combined non-food business be in better shape to compete? What is clear is that the increased complexity would likely distract the management of Sainsbury's in particular.'
James Grzinic, analyst at Jefferies, said Sainsbury's' 'leverage and lack of expertise in this area' made it difficult to put a positive spin on the deal.
'There is little that Sainsbury's can add in terms of expertise in non-food multi-channel offerings, and as a result the potential acquisition of what is largely viewed as a structurally challenged business will raise some eyebrows,' he said. 'We expect many to read into this a certain amount of concern by Sainsbury's management on the prospects of the core business.'
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by Gavin Lumsden on Sep 30, 2016 at 17:23