Analysts have raised an eyebrow about the benefits of a potential deal between J Sainsbury (SBRY) and Argos and Homebase owner Home Retail Group (HOME).
The grocer told the market earlier this week it had made a failed attempt in November to buy its retail rival and is now "considering its position". The statement sent Home Retail shares rocketing 40 per cent, but pulled Sainsbury's shares down 5 per cent - perhaps an expression of the market's confusion about the benefits of the deal.
Shore Capital analyst Clive Black said motivation for the transaction was akin to a "sledgehammer trying to crack a nut" as Sainsbury and its competitors had paid witness to the surge in demand for online grocery shopping. Mr Black admitted Argos "has its [e-commerce] strengths" but reckons it still lags behind its competitors, including Dixons Carphone (DC.), AO World (AO.) and behemoths such as Amazon (US: AMZN), which launched its own pantry service - a limited range of non-perishable food items available for delivery the next day - in November. What's more, Mr Black said he failed to see any "clear synergies" between the businesses as neither Homebase nor Argos specialise in the food or apparel categories. "To our mind there wouldn't be any huge cost savings involved either," he said.
Cooper City analyst Louise Cooper corroborated Mr Black's view. She said Argos wasn't a "top quality brand" and suggested it had too many stores. She acknowledged it had a solid distribution network, but stated it was not one designed to support the delivery of fresh fruits and vegetables. Argos and Homebase both have their own competitive pressures too, Ms Cooper said, adding that she saw little scope for Sainsbury's to grow its market share on this side of the enlarged business either.
Analyst Freddie George from brokerage Cantor Fitzgerald was more bullish - particularly in light of Home Retail Group's balance sheet. He said there was roughly £300m in cash and nearly £600m of mail-order debtors against a market cap of £1.1bn. He added the tie-up would help "diversify" the Sainsbury's business model, but added that he wouldn't be surprised to see Homebase sold if the deal completed given its smaller e-commerce operation.
