Sainsbury Seeks to Outduel Amazon in U.K. With Argos Deal

• CEO says takeover would give him competitive advantage
• Home Retail shares rise as comments spur bid speculation

Sainsbury is still considering whether to make a formal offer for Home Retail, which would cost about 1.2 billion pounds ($1.7 billion) based on its current market value. Many analysts remain skeptical, arguing that the grocer would struggle to achieve growth that Argos has found elusive over the last decade amid Amazon’s advances.
“Argos isn’t very far through its modernization, so Sainsbury shareholders would assume that risk,” Tony Shiret, an analyst at Haitong Securities, said by phone. “Argos is an ugly duckling. It won’t turn into a swan just because Sainsbury’s kisses it.”
Buying Home Retail would put Sainsbury on a collision course with Amazon, which entered the U.K. in 1998 and in recent months added groceries to its offering in the country. If Sainsbury and Argos combine, the business would stock roughly 100,000 products, a figure dwarfed by the 150 million items on sale at Amazon U.K.

Amazon Pantry

The online retailer is “disruptive in many markets, but not always successful,” Coupe said, when asked about Amazon’s entry into Britain’s grocery market through its Pantry service. Yet he acknowledged that the threat isn’t going away, saying the U.S. company “will keep trying until they get it right.”
Amazon declined to respond to the CEO’s comments.
Home Retail shares rose 5.7 percent to 150 pence at 11:26 a.m. in London as Coupe’s comments encouraged speculation that Sainsbury will make a formal offer. The London-based grocer said last week that it was considering a bid after having a cash-and-shares proposal rejected in November. It has until Feb. 2 to decide whether to make a formal offer under U.K. takeover rules.
Explaining the rationale for acquiring Home Retail, Coupe said the shift by shoppers toward convenience and online shopping will continue, adding that Sainsbury has been looking at Home Retail as a possible acquisition target for about 18 months. Sainsbury’s also moved to ease concerns that the businesses aren’t well matched. Based on a survey of 2,000 people, the company said about 40 percent of British households shop at both Argos and Sainsbury stores.
A deal is likely to lead to the closure of some of Argos’s 734 freestanding stores. Sainsbury said some outlets would be relocated into nearby supermarkets, without giving a specific number. Doing so would reduce Argos’s rent bill and allow Sainsbury to make better use of unproductive store space.
Still, Sainsbury isn’t relying on the takeover going ahead.
“This is not a must-do deal,” Chief Financial Officer John Rogers said on the call. “We will not overpay.”

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