– Home Retail Group plc (HOME LN): J Sainsbury plc (SBRY LN) just confirmed that it made an approach in November 2015 to Home Retail Group plc’s Board of Directors regarding a possible offer for Home Retail Group, in the form of Sainsbury‘s shares and cash. The approach was rejected by Home Retail Group and Sainsbury‘s is considering its position. No indication on what price level and/or consideration mix, with PUSU date set for 02 February 2016.
We are slightly surprised by this leftfield announcement by Sainsbury’s (as we somehow question the rationale of bringing these 2 different retail models together under 1 roof). Home Retail’s M&A rumours have mainly circled around its Homebase segment (about 25% of Home Retail’s total revenues and EBITDA): as recently December 2015, Leroy Merlin (French DIY retailer) was rumoured to be thinking of launching an offer for HomeBase.
However with Sainsbury’s having shown its hand and listing the many reasons why it wants to acquire Home Retail, it looks Sainsbury’s has put extreme pressure now on Home Retail and has almost effectively put it in play. It now looks it could get taken out by any joint bid effectively Sainsbury’s getting the Argos business with the Homebase business taken by a third party PE/strategic buyer (Sainsbury’s doesn’t list any interest or rationale for acquiring the Homebase segment).
With i) Home Retail still trading fairly cheap (at GBp 130 it trades less than 5x 2015e EV/EBITDA and about 13x P/E vs peers around 14-16x); ii) Sainsbury’s size, opportunistic timing (firstly 1 week before crucial Home Retail numbers and secondly after Home Retail profit warned in October 2015 with shares dropping from GBp 150 to below GBp 100) and commitment to do a deal (given it is updating markets now 2 months after it got its first (?) cash and shares offer rejected); iii) presence of multiple PE/strategic parties to take up Home Retail’s Homebase segment; iv) fact that any offer price most likely exceeded GBp 130 (Home Retail was trading on average around GBp 105 in November), we like the situation and and think there is a good chance that Sainsbury’s will want to continue in successfully pursuing Home Retail.
Most likely, however, that Sainsbury’s will want to wait to see Home Retail’s 14 January 2016 Interim Management Statement (over 90% of Argos profit comes from 2H), before potentially deciding to improve any offer.
At GBp 135 or about 37% up today, Home Retail is touch too high to get involved here and now. One to consider in Gbp 120-130 range.
Main next catalyst could be a statement from Home Retail, however also possible that Home Retail will refrain from commenting till it releases its crucial results next week.