Sainsbury's wins Argos-owner Home Retail after Steinhoff pulls out

The UK's second-largest supermarket chain Sainsbury's £1.3 billion ($1.9 billion) deal to buy Argos-owner Home Retail moved forward after rival suitor, South Africa's Steinhoff International, yesterday withdrew from the bidding war.

In early February, Sainsbury's, offered to buy Home Retail for 0.321 new Sainsbury's shares and 55 pence in cash for each of Home Retail shares. (See: British supermarket chain Sainsbury's to buy Argos-owner Home Retail for £1.3 bn)

The offer works out to a total of 167 pence a share.

In addition Home Retail shareholders would receive a capital return of about 25 pence per share and payment of 2.8 pence in lieu of a final dividend prior to completion of the deal.

The deal did not include Home Retail's Homebase do-it-yourself chain, which it had agreed in January to sell to Australia's Wesfarmers for £340 million.

Steinhoff International, which owns  Bensons for Beds and Harveys in the UK and Conforama in France made a 175 pence a share in cash counter bid, which was about £70 million more than Sainsbury's 167 pence a share offer.

But Sainsbury's share price has risen since Steinhoff tabled its counter offer, equating to 173.2 pence a share, or £1.4 billion provided a 2.8 pence special dividend is paid. Since it tabled its offer on 2 February, Sainsbury's share price has risen 12.5 per cent, thereby increasing the value of its offer by 6.2 per cent.

However, with just over two hours to go for the deadline of raising their respective bids, Steinhoff decided to walk away from the Argos deal, but instead agreed to buy electrical retailer Darty for £673 million, gate-crashing into an already agreed November 2015 merger pact between Darty and France's FNAC (See: Steinhoff tables rival $975 mn bid for British electrical retailer Darty).

Sainsbury's did not have to raise its offer and made a bid on its earlier terms, which was backed by the board of Home Retail.

The Sainsbury's-Home Retail merger would create a £6 billion non-food business like John Lewis and Marks & Spencer and will allow it to better compete with online giant Amazon.

Founded in 1869, Sainsbury's operates over 1,200 supermarkets and convenience stores, employs around 161,000 people and holds 16.7 per cent market share.

Post closing, Home Retail shareholders will own approximately 12 per cent of the combined group, while the remaining 88 per cent with Sainsbury shareholders.

Sainsbury expects to generate synergies of not less than £120 million in the third full year after completion through relocation of certain existing Argos stores into Sainsbury's stores, procurement benefits, and from the sale of Sainsbury's clothing, homewares and seasonal and leisure ranges through the existing Argos network.

Supermarkets and other retailers in the UK are facing tough competition from shopping websites, that have lower costs and can cut down prices.

Speed of delivery had become a key selling point, with Amazon now promising delivery within one hour in some parts of the UK. The big grocers also have to contend with competition from discount supermarket chains such as Aldi and Lidl.