Late on Friday, Steinhoff International Holdings NV, a South-African furniture and retail company, announced it put forward a £1.75  cash per share proposal to the Board of Home Retail Group plc. The Steinhoff proposal would be subject to certain pre-conditions, which can be waived, including satisfactory completion of due diligence, and is subject to a 5 pm 18 March 2016 PUSU deadline.

This statement comes literally just before Sainsbury’s own next Tuesday 23 February 2016 PUSU deadline by which Sainsbury’s was expected to release its own 2.7 announcement, a recommended cash and shares offer, currently worth Gbp 166.5 (based on Sainsbury’s Gbp 261 share price), or less than 5% below Steinhoff’s all cash proposal price (or about 6% below for the stub if comparing Sainsbury’s Gbp 138.7 offer for stub vs Steinhoff’s Gbp 147.2 offer for stub).

Although still relatively unknown as an entity in Europe, Steinhoff certainly is a very credible bidder (and despite being South-African, any recommended UK governed bid by them should equally trade as a relatively solid 6-9% pa rate of return trade), with an EV of almost EUR 20bn and as recently as December 2015 became listed on the Frankfurt stock exchange. In the past, Steinhoff has been a very aggressive M&A participant in Europe, and in the UK  has retail exposure through its ownership of furniture brands Harveys and Bensons for Beds. An acquisition of Argos would add a further significant, logical retail footprint fit in UK/Europe and would add significantly to its distribution network(s).

This last minute gatecrashing decision by Steinhoff is making things extremely complicated now for Sainsbury’s as it might have put Sainsbury’s against the wall now given 1) strategy and rationale of Sainsbury’s offer for Home Retail was being perceived as lukewarm at best (by Sainsbury’s shareholders), mainly perceived as ok on the premise that Sainsbury’s didn’t overpay and got it for a very reasonable price (once it might have to raise any offer price, that main attraction to a Home Retail bid might fall away);  2) so far it has been super borderline whether the Home Retail acquisition constituted a Class 1 or Class 2 transaction under UK Listing Authority rules (Class 1 requires a shareholder vote, Class 2 does not). We think that should they wish to raise, Sainsbury’s could only raise any bid to GBp 180-185, before it could be a Class 1 transaction, and would require the (highly questionable) shareholder approval (although we are not assuming here that should any raised bid would require shareholder approval, then it would automatically be a foregone negative conclusion); and 3) any further offer increase for Home Retail might put further pressure on Sainsbury’s share price (making any headline offer increase harder to execute).

Although Sainsbury’s should be the natural winner in a bidding contest against Steinhoff (given much larger scope for synergies, co-operation agreements with Argos and better knowledge of UK retail market – and Sainsbury’s could find a higher synergy number than the £120m number in the ongoing due diligence process, the more that it is understood their £120m  synergy number includes a number of  ‘haircuts’), the fact that Sainsbury’s faces significant restrictions in its bidding dynamics (price discipline, shareholder opposition, lack of clear rationale,…) might make Sainsbury’s much less aggressive in this bidding situation.

Hence, we would not chase Home Retail share price (significantly) through Gbp 175 price on this competitive situation/news, but would have/add more around GBp 170-172 (downside scenario should Sainsbury’s walk away and Steinhoff firms up with recommended 2.7 would be Gbp 168-170).