SA duo’s R30bn counter-bid for Argos hailed as Steinhoff tackles Sainsbury

South African super-entrepreneurs Christo Wiese (74) and Markus Jooste (55), who merged their companies last year, are clearly determined to flex their combined muscle in the global arena. Last night the Stellenbosch-based duo’s Steinhoff Group launched a surprise R30bn counter bid for which company UK retailing giant Sainsbury has been stalking since November and whose offer to purchase was supported by the directors. The object of their affection, discount British general retailer Argos, would be a perfect fit for the new-look Steinhoff whose roots are deeply embedded in the value market. This is the first potential deal since Wiese’s Pepkor was acquired for R62.8bn in November 2014 by Jooste’s Steinhoff in the JSE’s biggest ever transaction. Deal-maker Wiese, with 17%, became Steinhoff’s largest individual shareholder and continues to play an important role in the group run by Jooste. In December, the enlarged company transferred its primary listing to Frankfurt, becoming the German exchange’s largest new name for 2015. Steinhoff’s counter bid for Argos’s holding company London-listed Home Retail is classic Wiese. He would have noticed that a number of Sainsbury shareholders, including the Qatari fund which owns 25%, have publicly questioned their management’s rationale. Steinhoff’s all-cash offer of 175p a share is around 10% higher than a lot less complicated than the one tabled by Sainsbury. Also, in highly rated former Pick n Pay CEO Sean Summers, who now runs Steinhoff’s UK operations, the group has the ideal captain standing by were it to land this new ship. Although the bidding war has barely started, already some are suggesting Sainsbury would be best advised to walk away. – Alec Hogg

By Brooke Sutherland

(Bloomberg) — Sainsbury’s takeover of Home Retail was already of questionable logic. Getting into a bidding war for the struggling company would be even less sensible.

A pedestrian walks past an Argos store in London, Britain January 13, 2016. Sainsbury's, Britain's second-biggest supermarket, has agreed to buy Argos-owner Home Retail for 1.3 billion pounds ($1.87 billion) to boost its online credentials and expand beyond the cut-throat food sector. Home Retail, which said in January it had rejected an earlier undisclosed offer from Sainsbury's, said it was now willing to recommend a bid which, including a proposed capital return, implied a value of around 161.3 pence per Home Retail share.REUTERS/Stefan Wermuth
A pedestrian walks past an Argos store in London, Britain January 13, 2016. Sainsbury’s, Britain’s second-biggest supermarket, has agreed to buy Argos-owner Home Retail for 1.3 billion pounds ($1.87 billion) to boost its online credentials and expand beyond the cut-throat food sector. Home Retail, which said in January it had rejected an earlier undisclosed offer from Sainsbury’s, said it was now willing to recommend a bid which, including a proposed capital return, implied a value of around 161.3 pence per Home Retail share.REUTERS/Stefan Wermuth

Steinhoff International Holdings — a furniture chain once based in South Africa that’s seeking to expand in Europe — made an offer of about $2 billion for Home Retail on Friday that threatens to derail Sainsbury’s agreement to buy the operator of the Argos chain. Not only is Steinhoff offering a higher price, it’s proposing to pay for the British retailer all  in cash. The onus is now on Sainsbury to come up with a counterbid of its own. Maybe it should walk away instead.

Sainsbury,  a U.K. grocery chain, wants to use Argos goods to fill extra space on its shelves and tap Home Retail’s expertise in click-and-collect services — which allow customers to shop online and pick up their purchases at stores — in the fight against Amazon. But as my colleague Andrea Felsted has noted, Sainsbury has been successful in navigating a fiercely competitive market because of its focus on cost cuts and investments in quality. This deal is a diversion that it doesn’t need and that won’t necessarily revive growth.

The only saving grace was that, at the agreed-upon price, Sainsbury got Home Retail on the cheap. The headline number for the transaction announced earlier this month is 161.3 pence a share in stock and cash, but that includes 25 pence for the already announced sale of Home Retail’s Homebase DIY chain to Australia’s Wesfarmers and 2.8 pence in lieu of a dividend. So really the cost to Sainsbury is more like 133.5 pence a share. Steinhoff also includes the dividend and Homebase payout as part of its bid, but it’s offering 147.2 pence in cash for the rest.

To best Steinhoff, Sainsbury is probably going to have to offer substantially more to make up for the lower cash component. Does it really want to go down that road? Because it’s not really ponying up the full 161.3 pence of its current agreement, Sainsbury could probably afford to raise its bid a bit. What it can’t do is offer all cash, given balance sheet constraints.

Steinhoff must be serious about wanting Home Retail to get involved this late in the game. The company has been trying to expand in Europe and even moved its headquarters to Amsterdam as it seeks to counter less-than-ideal economic conditions in its previous home base of South Africa. Buying Home Retail would go a ways toward helping Steinhoff increase its European presence and seems to be the type of thing for which it would be willing to pay up.

For its part, Sainsbury has already signaled it wants to be disciplined on price. Talks stalled with Home Retail at one point because the company wanted more than Sainsbury was willing to pay, people familiar with the matter told Bloomberg News.

Whether Sainsbury will counterbid remains to be seen. But as Haitong retail analyst Tony Shiret said when news of the deal talks first broke: If Sainsbury gets forced to pay up, “it all looks an expensive potential banana skin.”

From Reuters

LONDON, Feb 19 (Reuters) – South African-based furniture retailer Steinhoff International has made a rival offer to buy Britain’s Home Retail, the owner of the Argos group of catalogue-based stores which agreed earlier this month to be bought by supermarkets group Sainsbury’s.

Steinhoff, which makes furniture mostly in developing countries and retails its products in Europe, said on Friday it had made a proposal to the Home Retail board which if accepted would give shareholders 147.2 pence in cash plus 27.8 pence in capital return and dividend payments before completion.

Steinhoff said it was supportive of Home Retail’s decision to sell its Homebase chain to Wesfarmers Ltd, a move that would return 200 million pounds ($287 million) to Home Retail shareholders.

Home Retail said it was reviewing the proposal and urged its shareholders to take no further action.

Steinhoff’s offer comes at a time when Britain’s grocery sector has been hammered by the growth of discount groups including Germany’s Aldi and Lidl and by online competition.

Home Retail had previously said it was willing to recommend the Sainsbury’s bid of 161.3 pence per Home Retail share, valuing the firm at 1.3 billion pounds ($1.87 billion).

A combination of Home Retail and Sainsbury was expected to create the country’s largest general merchandise retail business.

The acquisition is a response to intense competition between British supermarket groups and makes Sainsbury’s the second largest player in the sector, less reliant on a food market showing little growth.

Combining Sainsbury’s and Home Retail’s Argos will forge a group offering over 100,000 products from 2,000 stores, bigger than the UK clothing and general merchandise business of Tesco , Britain’s biggest retailer, John Lewis, Marks & Spencer and Amazon, which is fast expanding into the UK grocery market. ($1 = 0.6965 pounds)

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