Sainsbury’s bidding for Argos does not seem to make sense, but when you look at it more closely…
Genius or madness? That’s what one City analyst wondered when news of Sainsbury’s bid approach to Home Retail Group, owner of Argos and Homebase, broke last week. Madness – or, at the very least, an unnecessary distraction – concluded most observers.
Isn’t Argos in mortal danger from the relentless march of Amazon? Isn’t Sainsbury’s itself trying to keep its ahead above water in a grocery market suffering deflation, discounting and maybe disruption from the same Amazonian monster?
As for Homebase, Sainsbury’s doesn’t seem to want to own it anyway. It might flip the DIY chain to a new owner as quickly as it can, introducing another uncertainty into the arithmetic of the deal.
In other words, Mike Coupe, Sainsbury’s chief executive, faces a tough task convincing his own shareholders of the wisdom of paying £1bn-plus to build what the supermarket chain called “an integrated multi-channel proposition” spanning food and non-food lines. It was only the target’s shareholders (if not their board – yet) who seemed outright enthusiastic – but any takeover bid at a half-decent premium will feel like sweet relief after last year’s halving of Home Retail’s share price.
But is the logic of a Sainsbury’s/Argos combo really so daft, though? Actually, probably not. There are two arguments – one short-term, one long-term – for why Coupe may be on to something and why the inevitable upheaval for his staff may prove to be worth the risk.
The short-term appeal is that 40% of Argos leases expire in the next four years. That presents an early opportunity to close those shops and open a replacement Argos unit within the nearest Sainsbury’s supermarket, many of which have surplus space. There could be about 350 such units within a few years. If all Argos punters stay loyal, there are two benefits: you make a big saving on rent but keep all the custom; and some of the Argos punters may pick up a few groceries while they collect their toasters, toys and gadgets. Ten experimental Argos concessions within Sainsbury’s stores are said to have traded well in the past year.
The long-term benefit is woollier – but perhaps more significant if Sainsbury’s analysis is correct. It is the idea that, in the “multi-channel” age, speed and ease of delivery are retailers’ best weapons.
Facing up to the Amazon threat, Argos has developed a same-day delivery service, albeit not without hiccups. If those deliveries could be diverted to a Sainsbury’s store, if the customer wishes, another 1,300 pick-up points would join the network. The philosophy clearly works for the John Lewis Partnership, the department store and Waitrose group.
Do such advantages amount to genius? Not without hard numbers to support them. Sainsbury’s shareholders should demand several details before they support any takeover terms Coupe and chairman David Tyler can agree with the Home Retail board. What is the real size of the rental saving from closing Argos stores? How quickly could it be secured? How many Argos stores would have to be closed in addition? What is the uplift in sales at those 10 Sainsbury’s stores with Argos units? How much would Homebase fetch, realistically? Can Sainsbury’s balance sheet stand the strain of a takeover funded partly in cash? And, most importantly, how much extra investment would be required to integrate IT systems and back-office logistics?
If Coupe can provide credible answers on all those points, investors should support the adventure. The merger between Dixons and Carphone Warehouse, which has enjoyed a successful first year, is one concrete example of mutually beneficial piece of deal-making.
A Sainsbury’s/Argos combination sounds more unlikely on paper – the customer stereotypes are miles apart – but it might just work. Indeed, if it had been proposed a decade ago, it would have laughed out of court but, as it turns out, it would been exactly in tune with shifting shopping habits in the 21st century.
Wind of change in
The Saudi government has lobbed a hand grenade into the debate on the future of oil prices by proposing the stock market flotation of its corporate crown jewel, Saudi Aramco.
The possibility that a multitrillion-dollar oil and gas giant could be prepared for an initial public offering will have western investment bankers booking air tickets to
10 to the dozen as they vie for a potential bonanza of advice work. Western oil majors and Asian state-owned energy groups likewise will wet their lips at possibly gaining access to some of the world’s cheapest and largest oil and gas reserves.
Shell would surely have kept the $7bn it wasted on high-cost and high-risk Arctic exploration had it known there might be a possibility of spending it on a chunk of Aramco, which has 650bn barrels of reserves (10 times those of ExxonMobil).
Meanwhile, oil traders wonder what it means for future oil prices given that the Saudis have been instrumental in driving down global crude values by refusing to countenance a cut in Opec production targets. Will that strategy change? Certainly you would not choose to sell a commodity-based business at a time when prices have fallen 70% in 18 months and with stock market valuations for the sector on the floor.
At least part of the rationale of an IPO is to raise cash for the Saudi exchequer at a time when the country has seen a rising national budget deficit due to the collapse in its vital oil revenues. Or is it designed to show that the state is prepared to make its sacrifices as it has recently cut subsidies in domestic fuel prices? Or are the Saudis preparing to battle it out with US shale producers long-term by keeping Aramco production high?
As with all things Saudi, there is scant information, just a clear statement of intent and backing from the king’s powerful son, Prince Mohammed bin Salman, that an IPO is being seriously considered for a company previously thought one of the least likely to be put into private hands. But if an IPO is to attract western investors, the Saudis will have to share decision-making and break an addiction to secrecy. Can they do that?
Pennycook’s many parts
Richard Pennycook was paid £2.5m last year for his role as chief executive of the Co-operative Group, now largely a supermarkets group. Yet, when he resigned from his role as a non-executive director of housebuilder Persimmon last week, citing time commitments, there was no mention of his full-time job at the Co-op. Instead, it was his appointment as chairman of Howdens Joinery from May 2016 that was regarded as the additional pressure on his time.
He was already sitting on the board of Howdens, so in giving up Persimmon he turned two non-executive roles into one big non-exec role alongside his chairmanship of the online department store The Hut.
With master of serial directorships, Allan Leighton, chairing the Co-op, such plurality will no doubt be deftly managed.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer