Why J Sainsbury plc’s Pitch At Home Retail Group plc Could Be A Masterstroke

Today, Sainsbury’s (LSE: SBRY) confirmed that it made an approach in November to Home Retail (LSE: HOME) — the owner of the Argos and Homebase chains — regarding a possible offer for the group, in the form of Sainsbury’s shares and cash.

Sadly, Home Retail rejected the approach and Sainsbury’s is “considering its position”.

Why the offer is a good idea

I hope that Sainsbury’s and Home Retail can agree on terms so that a deal can go through. A union of the two embattled firms could be good for shareholders of each company.

Home Retail has struggled to keep trading momentum for years. The Homebase DIY and Argos chains of outlets seem so last century. Faced with the migration of shoppers to internet-based retailers and to discounters, Home Retail has seen stagnant revenues and volatile profits in recent years, and it’s hard to see another way out for the company’s investors. Those looking for growth from the existing business model could be too optimistic, in my view. The world has changed since the firm’s trading model was conceived, and it looks dated.

Sainsbury’s, on the other hand, needs a new direction if it is to thrive. The traditional supermarket sector in Britain is in decline, with upstart discounters such as Aldi and Lidl chomping into an alarming 10% or so of market share — and rising rapidly. Perhaps this proposed takeover of Home Retail is a potential masterstroke that puts Sainsbury’s ahead of other struggling goliaths such as Tesco, WM Morrison and Asda.

The prize of enhanced trading

J Sainsbury says that it has been working in partnership with Home Retail trialling a number of Argos concessions in Sainsbury’s stores during 2015. That in itself seems to be an idea with great potential. Many Argos stores still occupy high-street locations. That strikes me as inappropriate in today’s world. When customers buy and collect often-bulky goods, they need out-of-town locations with decent car parking, not hard-to-get-to locations with a long walk and paid-for parking. Supermarket locations seem ideal, so there could be potential to enhance sales right there.

Sainsbury’s directors reckon: The combination is an opportunity to bring together two of the UK’s leading retail businesses, with complementary product offers, focused on delivering quality products and services at fair prices, through an integrated, multi-channel proposition.”

It is encouraging to see that Sainsbury’s aims to dilute its reliance on food retailing. For the sake of my own investing strategy, I’m working on the assumption that the supermarkets as we know them face slow but relentless decline. If Sainsbury’s wants any shot at all at decent growth, it needs to change. A deal with Home Retail could provide enough change of direction and enhancement of the customer offering to achieve renewed sales impetus. On top of that, there could be sufficient cost savings and synergies resulting from a takeover to squeeze more profit from the combined operation.

From the Home Retail perspective, any worthwhile takeover offer looks like a face-saving lifeline that could help the firm put itself and its shareholders out of their misery. I hope the two boards get back to their negotiations soon, with a positive outcome!

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.