18th Mar 2016 17:41
LONDON (Alliance News) - J Sainsbury PLC has decided to follow through on its decision to acquire Home Retail Group PLC, the owner of Argos, after a rival bidder exited the race, despite stating the deal was not a "must-do" for the supermarket chain earlier this week.
Sainsbury's became the sole runner in the race to purchase Home Retail after Steinhoff International Holdings NV, the other bidder which had placed a higher offer, said it would not be making a firm offer for the company after striking another deal with a separate company.
Home Retail shareholders may be disappointed of the developments late Friday, as Steinhoff's offer for the company was around 8.5% higher than Sainsbury's offer.
Sainsbury's firm offer is the same as the indicative offer that it made, offering Home Retail shareholders a cash and share deal that also includes a special dividend. Home Retail shareholders will own around 12% of the enlarged business if the deal is completed.
Sainsbury's have offered Home Retail shareholders 55.0 pence in cash per share and 0.321 Sainsbury shares.
In addition, Home Retail Group shareholders will each receive a special dividend of 27.8 pence per share, but that will only be paid if Home Retail pays it before the Sainsbury's offer becomes unconditional, the supermarket said.
Sainsbury's highlighted that Home Retail indicated it was set to pay that 27.8 pence special dividend to its shareholders irrespective of whether or not an offer was made for the company, suggesting shareholders can expect the special dividend.
Sainsbury said its offer will be unaffected should Home Retail, for whatever reason, decide not to pay the special dividend.
That special dividend is comprised of 25.0 pence per share for the sale of Home Retail's Homebase chain to Wesfarmers Ltd, and a 2.8 pence dividend in lieu of a final dividend for Home Retail's financial year ended February 27, 2016.
Home Retail completed the disposal of its Homebase DIY business to Australia's Wesfarmers in late February for GBP340.0 million. The special 25.0 pence per share dividend is expected to consume GBP200.0 million of those proceeds.
Excluding the special dividend, the offer made by Sainsbury's represents and indicative value of 145.4 pence per Home Retail Group share, valuing the chain at GBP1.20 billion.
Including the special dividend, if paid, the offer represents and indicative value of 173.2 pence per share, valuing Home Retail Group at GBP1.40 billion.
The valuations are slightly different compared to the indicative offer on account of the change in Sainsbury's share price between the indicative and firm offer being made.
Sainsbury's said Home Retail Group has not yet recommended its offer, but said it will continue to discuss the merits of the deal.
In a statement later Friday, Home Retail confirmed the firm offer had been made and noted that Sainsbury's was hoping to secure a recommendation from the company. Home Retail stopped short and said it "looks forward to working with Sainsbury's towards such recommendation."
Home Retail said it will make another announcement in due course.
Following its due diligence on the offer, the supermarket chain believes it can achieve a higher level of earnings before interest, tax, depreciation and amortisation synergies in the third full year after the deal is completed, of "no less than" GBP160.0 million, compared to the previous estimate of only GBP120.0 million.
However, Sainsbury's will need to spend GBP140.0 million to achieve those synergies over a three year period, and is expected to book a one one-off cost amounting to GBP130.0 million as well - wiping out those expected synergies.
Sainsbury's said around 15% of those Ebitda synergies would be achieved in the first full year after the deal was completed, followed by 65% in the second year before hitting that minimum target of GBP160.0 million in the third year.
The increase from the previous estimate is thanks to a GBP15.0 million increase in the estimated synergies from Argos concessions due to an increase in the number of concession opportunities and increased occupancy cost savings a GBP30.0 million increase in expected cost synergies and GBP5.0 million extra in other revenue synergies as a result of revised assumptions on clothing, homewares and other products.
Importantly, that will result in a one-off cost of GBP130.0 million, of which 50% will be encountered in the first year following completion, 20% in the second and the remaining 30% in the third year.
It is also expected that incremental capital expenditure of approximately GBP140.0 million will be incurred in the three years following completion, relating to store fit-out expenditure, it said.
"The Sainsbury's directors expect that the offer will result in double digit earnings per share accretion (excluding the effects of implementation costs) and a low to mid teens return on invested capital (inclusive of implementation costs) in the third full year following completion," said Sainsbury's on Friday.
Sainsbury's is attempting to create "a leading food and non-food retailer of choice for customers" through the deal, it said Friday, despite the supermarket's Chief Executive Mike Coupe stating it was not a "must-do" deal earlier this week, adding that Sainsbury's would be successful with or without Argos.
Sainsbury's Chairman David Tyler seemed more upbeat following the offer Friday, stating the deal would present an opportunity to accelerate the supermarket's strategy and create a multi-product, multi-channel proposition with fast delivery networks.
The supermarket said the enlarged group would benefit from profitable sales growth, optimising the use of retail space, by creating cross selling opportunities and said it will create a financial services proposition that will provide a wider range of customer-centric services including credit cards, loans, deposits, insurance and ATMs.
Most notably, the deal would result in existing Argos stores being relocated into Sainsbury's supermarkets to reduce costs, and to expand the Argos store network by opening new infill Argos stores within Sainsbury's supermarkets in catchments that are not currently served by Argos.
Steinhoff International Holdings NV, the owner of Benson for Beds and Harveys, was set to potentially launch a firm offer for Home Retail Group on Friday, but said it would no longer be making a bid after striking a deal to potentially acquire London-listed Darty PLC instead.
Steinhoff's indicative offer for Home Retail, before it pulled out moments before the deadline on Friday, was for 175.0 pence per Home Retail share, comprised of 147.2 pence per share in cash plus the special dividend of 27.8 pence.
Sainsbury's shares closed down 3% to 273.20 pence per share on Friday whilst Home Retail shares closed down 9.9% to 163.20 pence.
By Joshua Warner; [email protected]; @JoshAlliance
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