Sainsbury’s is the UK’s third-biggest grocer. Picture: REUTERS
Sainsbury’s offer for Home Retail has been bested by Steinhoff. Picture: REUTERS

NEW YORK — 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 SA that’s seeking to expand in Europe — made an offer of about $2bn 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 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. 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 it does not need and that will not necessarily revive growth.

The only saving grace was that, at the agreed-on price, Sainsbury got Home Retail on the cheap. The headline number for the transaction announced earlier in February is 161.3 pence a share in stock and cash, but that includes 25p for the already announced sale of Home Retail’s Homebase DIY chain to Australia’s Wesfarmers and 2.8p in lieu of a dividend. So really the cost to Sainsbury is more like 133.5p a share. Steinhoff also includes the dividend and Homebase payout as part of its bid, but it is offering 147.2p 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 is not really paying the full 161.3p 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 SA. Buying Home Retail would go some way towards 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 signalled 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".

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

While Sainsbury and Home Retail have announced the terms of the deal, they had yet to hammer out a formal offer. Sainsbury had until February 23 to do so. 

Bloomberg