They say a good poker player should never reveal their hand too early.
After Sainsbury’s bid for Argos was comprehensively gazumped by South African retailer Steinhoff, it’s starting to look like Sainsbury’s and its CFO John Rogers slapped their cards on the table before all the other players were out of the game.
When Sainsbury’s 160p per share deal was provisionally agreed by the Home Retail board, Rogers spent a great deal of time explaining the financial mechanics of the deal and how Sainsbury’s was able to use Argos’ own balance sheet to effectively help fund the deal.
The details seemed to win over doubters the City – but Steinhoff also seems to have been so convinced by Rogers’ rationale that it thought it would try for a piece of the action too so good were the terms.
Steinhoff’s 175p per share bid now leaves Sainsbury’s in a tricky spot.
Although CEO Mike Coupe has always contended the Argos deal would merely accelerate Sainsbury’s evolution into a multi-service, multi-platform retailer, the supermarket has rather publicly nailed its colours to the Argos mast.
Losing out on Argos would now been seen as a huge blow to Coupe’s strategic ambitions to move the retailer away from a food-dominated business when just a couple of months ago some were questioning his sanity for perusing the deal in the first place.
As Bernstein’s Bruno Monteyne summarises: “Sainsbury’s has effectively questioned the rationale of a “standalone food retail” and it needed this extra non-food capability… Pulling away from the deal would leave an important strategic question mark of how they plan to fill that gap.”
Given this – and Rogers’ previous assurances that the deal represented tremendous value to Sainsbury’s shareholders – you would probably expect Sainsbury’s has a bit of wiggle-room on price and will come back with an improved offer.
But how much wiggle-room does it truly have much? There’s clearly a price that Sainsbury’s shareholders will not stomach given the lukewarm reception the deal originally received. The question now is what it that limit that Sainsbury’s can and will pay?
Home Retail investors aren’t interested in future retail synergies or how Argos’ loan book dovetails with Sainsbury’s Bank. They want cash and as much of it as possible.
This presents another problem for Sainsbury’s. Even if it matches Steinhoff’s 175p bid, its cash and shares offer is likely to look less attractive than Steinhoff’s pure cash offer. With conditions in the grocery sector as they are, convincing Home Retail shareholders they would be better off with a wedge of Sainsbury’s shares rather than cash might not prove an easy sell.
Sainsbury’s might feel it now has little option to come back and offer in the 175p range given it has already come so far. Some good news for the retailer is that its own recent share price rise means the value of its bid is already in the 168p region, so it would need to find just another £67m (or its shares to rise another 10%) to match Steinhoff’s bid.
But is 175p Steinhoff’s absolute limit? There appear few advantages for Sainsbury’s in getting into an outright bidding war.
Analysts at Exane don’t fancy Sainsbury’s chances of winning such a war, noting: “The battle for Home Retail therefore centre’s on management’s conviction of a deal with diminishing returns. A Sainsbury’s counter-bid is likely, but we believe it is most likely that Steinhoff wins this battle.”
However, they suggest an intriguing compromise: “A Steinhoff acquisition followed by a roll-out of Argos implants in Sainsbury’s stores could offer both partners a strategic solution.”
It seems inevitable Sainsbury’s will ask for an extension to tomorrow’s regulatory deadline. After that – as inevitably happens to poker players - Sainsbury’s is faced with the prospect of either folding or going all in.