Where next for Sainsbury's-Argos?

News of Steinhoff’s last minute counter-bid for Argos, from a company with a market capitalisation of €19bn vs. Sainsbury’s €6.2bn (£4.9bn), and taking into account Sainsbury’s top limit vs. Steinhoff’s opening bid, it is probable that Sainsbury’s will ask for, and receive, an extension of the bidding process to 18th March to consider their options.

However, given that they are at the limit of a cash & shares combination, it is unlikely that Sainsbury’s will enter, much less beat Steinhoff in a bidding war.

This means that Sainsbury’s NAMs need to factor in a period (until 18th March) of uncertainty and distraction. Barring accidents - some outside development by government or counter bidder - Steinhoff will be successful...

In practice the inevitability of a failure by Sainsbury's to diversify via Argos means either a re-focus on optimising the current operation ‘as is’ or a new search for further diversification opportunities. Making the best of the existing mix means growing at the expense of the other mults, sharpening its competitive edge, with the help of suppliers

NAMs need to drill down to the level of their Sainsbury’s categories in order to best position their offerings within the retailer’s competitive platform, whilst maintaining the harmony of their trading relationships with other mults.

Meanwhile, Argos NAMs need to prepare for a radically different approach to their major customer, under new ownership. This means, treating the 'new' Argos as a new customer, going back to basics and re-profiling the retailer within their customer portfolio....

Exploring how Steinhoff's other UK operations are managed might also help...

Argos - a Local-leap by Sainsbury's?

Yesterday’s surprise announcement of an initial rebuff by HRG not only places the Argos-Homebase combination firmly in the takeover frame, but also sets a minimum starting price of £1bn.

The advantages for Sainsbury’s in terms of adding to their non-food offering, making more use of big-space via a transfer of Argos Click & Collect, and re-acquiring a DIY operation they sold some years back, combined with successful initial trials of Argos shop-in-shop make this a must-have acquisition, but not at any price.

Incidentally, gaining access to Argos Click & Collect expertise hopefully does not rank high in terms of plus-points, given that this ‘mail-order’ company transitioned into ‘hard-copy’ click & collect as an extension of their original business rather than a high-tech entry into online…

It also goes without saying that Argos vs. Amazon is a no-contest battle, on any parameter…

In terms of upping-the-ante, with a market capitalisation of £5bn, a share price showing a 57% drop since 2008, and continuing pressure from the discounters, Sainsbury’s is not in a position to raise their bid significantly in the month that remains in which to make an improved offer.

However, having put HRG in the spotlight, other mults now have until 2nd February to assess the relative appeal of acquisition in terms of similar advantages to their businesses.

In practice, Tesco and Morrisons are currently distracted by more pressing issues, but Asda’s Walmart (Mkt Cap $196bn) would have little problem in covering ‘whatever it takes’ to add scale to their UK repertoire…

On balance, the next move depends on the extent to which Sainsbury’s faith in the future of Local convenience causes them to consider converting ‘as many as it takes’ of Argos 800 High Street outlets – moving more Argos ranges into larger Sainsbury’s outlets – into additional Local branches, and persuading their largest shareholder - Qatari - to make up the difference…