Nobody likes being in the office over the weekend but it was with good reason that the bigwigs at Sainsbury’s and Home Retail Group (HRG) were hard at work on Sunday. Last month the supermarket chain said it was keen to buy HRG, but the Argos and Homebase owner was holding out for a higher price.
So the two retailers have been working hard to thrash out a figure they could agree on before this afternoon’s stock market-imposed deadline. This morning the companies announced they had reached an agreement, valuing HRG at £1.3bn. But while the two boards might be happy with their weekend’s work, the deal still has several obstacles to overcome.
First of all it is subject to due diligence. This latest announcement does not represent a formal offer from Sainsbury’s, but both parties have agreed to extend the stock market deadline until 23 February. For the next few weeks Sainsbury’s suits will be scouring HRG’s books to make sure there are no skeletons in the closet before the supermarket hands over its cash.
Read more: Why Sainsbury's wants to buy Argos
Then the deal will need to get the approval of shareholders. Schroders, which owns about 20% of HRG’s shares, was reportedly holding out for a £1.4bn valuation. But looking at HRG's recent performance, you might think rejecting £1.3bn would be a case of looking a gift horse in the mouth.
Sainsbury’s is offering HRG shareholders the equivalent of 161.3p per share, including 25p per share of proceeds from the forthcoming sale of Homebase and 2.8p in lieu of a final dividend for this year. That's a 63% premium on their January 4th price of 98p, but its' still way down on where they have been trading in the last couple of years. As recently as January 2015 they were as high as 218p.
Throughout the negotiations HRG’s chief exec John Walden and the rest of its board have insisted they are still confident they can turn the business’s performance around without the help of Sainsbury’s. Shareholders who believe that might be tempted to say ‘no deal’.
Credit: Yahoo Finance
If shareholders do give the go ahead there’s also the chance that competition regulators could, at the very least, slow things down a bit. The Competition and Markets Authority hasn’t shied away from getting involved in retail tie-ups of late and it delayed Poundland’s 99p Stores takeover by several months. Although Sainsbury’s is primarily a grocer and Argos sells non-food products, the two do have some overlap in the market for homewares and electricals – which could give the CMA something to make a stink about.
With both boards now in agreement and a reasonable offer on the table, a Sainsbury’s-Argos tie-up is looking pretty sewn up. But it could be a good while before we see the companies physically merge into one.