Warnings of ballooning debt if Sainsbury’s bid for Argos is accepted

Sainsbury’s has a debt pile of £1.6bn – compared with a £4.6bn market value – which would balloon if it launches a risky £1bn-plus takeover for Home Retai

Michael Bow,Simon Neville
Thursday 07 January 2016 02:05 GMT
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The supermarket would benefit from Argos’ logistics business
The supermarket would benefit from Argos’ logistics business

Sainsbury’s runs the risk of becoming overloaded with debt and could have to tap shareholders for cash to buy Home Retail Group, leading investors have warned.

The company shocked the City on Tuesday by revealing it had approached the owner of Argos and Homebase about a takeover in November, offering a combination of cash and its own shares. The offer was rebuffed by Home Retail but paves the way for a second stab at a takeover by Sainsbury’s boss, Mike Coupe.

Sainsbury’s has a debt pile of £1.6bn – compared with a £4.6bn market value – which would balloon if it launches a risky £1bn-plus takeover for Home Retail, shareholders warned. Home Retail had £309m net cash on its balance sheet in February 2015.

Richard Buxton, the chief executive of Old Mutual, a top 10 shareholder, said: “The great thing at Home Retail Group is a rock-solid balance sheet. You could put the debtor book into Sainsbury’s bank and with a cash and shares offer they’d just be giving Home Retail shareholders their own cash back. Sainsbury’s does not have a strong balance sheet but an awful lot of debt – so you have to be compensated for losing a strong balance sheet and the profit potential if the Argos transformation works.

“I’m supremely confident they really want this business and that they will come back with a formal offer.”

Buying Home Retail would add more leaseback properties to its portfolio – potentially increasing leverage which could further burden the group’s credit-worthiness. Sainsbury’s shares are down 6 per cent since news of the potential deal leaked out. Home Retail closed the day 4.95 per cent down, but still remain well above the undisturbed 100p per share price at 132p.

Another fund manager, who wanted to remain anonymous, said Sainsbury’s could face challenges in financing the deal and finding a solution to struggling Homebase, which it previously owned until 2000: “It’s quite a questionable deal and a little bit opportunistic.”

Investors warned that Sainsbury’s may have to go cap in hand to shareholders to raise the cash to help finance the deal, either via rights issues or by issuing new shares in a placing. The retailer could also be tempted to offload Homebase stores for a nominal sum if it clinched a deal.

Another City source, who owns shares in both companies, said Mr Coupe was pursuing the deal because Sainsbury’s higher cost of capital meant it was more expensive to grow the business organically, and “It’s cheaper to buy it than build it.”

Sainsbury’s would benefit from Argos’ impressive logistics business. Having a number of brands under one roof would also help it cross-sell more products to shoppers, part of a growing trend by shops to use their space more wisely.

“Sainsbury’s could use the Argos delivery network; the store leases are up within five years so some could be closed and smaller Argoses converted to Sainsbury’s Locals, as well as clearly accelerating putting Argos into larger Sainsbury’s,” Mr Buxton said.

Despite a rise in consumer spending, Home Retail has failed to capture the benefits – frustrating investors.

That was evident when shareholders blasted the company for not consulting them.

Martin Hughes, the founder of Toscafund, which owns 5 per cent of Home Retail, said: “Leading shareholders of Home Retail are sympathetic to Sainsbury’s approach. They are unhappy the board of Home Retail did not consult prior to rejection.”

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