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Sainsbury’s investors may question whether the price is right for Home Retail Group

2nd February 2016 Print

Sainsbury’s agrees a takeover deal for Home Retail Group, Helal Miah, investment research analyst at The Share Centre, explains what this mean for investors.

“The announcement this morning did not come as too much of a surprise as the deadline approached, and Home Retail’s shares jumped yesterday. The two high street giants will be hoping that together they can fend off increasing competition from the likes of Amazon, which is constantly expanding and mulling a move into the food business.

“Home Retail have accepted the part cash and shares offer which values each Home Retail share at 161.3p based on Sainsbury’s close price yesterday. However, some Sainsbury’s shareholders may question the 63% premium paid. Home Retail has struggled in recent years, with sales barely showing any growth. Just like the supermarkets, Argos has faced tough competition lately – not just from high street retailers but also from internet sales.

“The rationale behind the deal is to enhance Sainsbury’s multi-channel capabilities including their digital, delivery and retail space opportunities. It is hoped that it will deliver material cost synergies, estimated to be at least £120m in the third year. A number of Argos stores will be run as concessions within Sainsbury’s stores, while Sainsbury’s non-food items such as clothing will be sold in Argos stores. These cross-selling opportunities should also expand the click and collect services that they offer.

“We continue to rate Sainsbury’s as a ‘buy’ for contrarian investors willing to accept a medium level of risk.”