Sainsbury faces slippery slope in Home Retail bid war

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.
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 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 UK 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. So far, 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.