Sainsbury’s interest in Argos and Homebase rattles markets

Lord Wolfson, the highly regarded chief executive of Next, had every reason yesterday to be grateful to Mike Coupe, his opposite number at Sainsbury’s.

A rare stumble by the fashion retailer over the festive season was the talk of the stores sector, with Next shares tumbling 5 per cent as it fell well short of the City’s sales forecasts.

By lunchtime, however, supermarkets group Sainsbury’s was jostling Next for position at the top of the table of FTSE 100 fallers as it caught traders on the hop with news that it had made a £1 billion bid approach for Home Retail Group, owner of the Argos and Homebase chains. While shares in its target soared by a third, Sainsbury’s went into reverse as analysts fretted that a move on Home Retail would distract the supermarket group from tending to its core business in the cut-throat grocery market.

Home Retail rejected Sainsbury’s approach, which was made in November. And while Sainsbury’s said yesterday there was no certainty an offer would be made, it is clearly very keen to do a deal.

Bringing together two of the UK’s leading retailers would, it said, be “an attractive proposition for the customers and shareholders of both companies, establishing a platform for long-term value-creation”.

It would create “a food and non-food retailer of choice” for customers, and there would be benefits in fast and flexible delivery to store or home across a wide range of products, from food and grocery to clothing, homewares, toys, stationery, electrical goods and furniture.

Real target

Sainsbury’s has been collaborating with Home Retail for the past year, trialling Argos concessions in a number of its supermarkets. However, its statement extolling the advantages of a deal made no mention of the Homebase DIY chain – which Sainsbury’s once owned – and it looks as though Argos is the real target.

The timing of Sainsbury’s move looks suitably opportunistic – it was in late October that Home Retail shocked the market with a pre-Black Friday profits warning that sent its shares tumbling. The group said it would not meet market expectations partly because Argos was having to spend so much taking on extra drivers and vans for anticipated Black Friday deliveries. As it turned out, Black Friday was a damp squib for much of the retail sector and Home Retail’s performance in the run-up to Christmas is not expected to impress.

Although Home Retail has been the subject of takeover speculation for some weeks, the emergence of Sainsbury’s as a bidder came as something of a surprise to the market and not a particularly welcome one as demonstrated by the 5 per cent fall in its shares.

Analysts fear that, should it press ahead with a bid, management will be distracted from the tough task of keeping the group on an even keel in the increasingly competitive grocery market. If it succeeds in a bid, integrating the Argos business would further eat into management time and resources.

There are also worries that Argos, best-known for its catalogue showrooms, has already been overtaken in the fast-moving digital world.

Warm weather

The distraction of Sainsbury’s move on Home Retail did divert some of the spotlight away from Next yesterday but there was no mistaking the City’s disappointment with the fashion retailer’s performance. Its sales fell well short of forecasts, largely due to unusually warm weather in November and December, which made it impossible to shift winter clothing.

Next compounded the weather effect with problems of its own making, including having too much stock for its big catalogue and not enough for the smaller, fast-fashion brochures it releases throughout the season to supplement the Directory. Sales growth at the Directory slowed from more than 6 per cent to just 2 per cent.

The unexpectedly poor performance from Next sent tremors through the rest of the stores sector. If a company as well-run as Lord Wolfson’s retail empire stumbled over Christmas, then what of the sector’s laggards such as Marks & Spencer and Debenhams?

Fiona Walsh is business editor of theguardian.com