Is J Sainsbury plc biting off more than it can chew with Home Retail Group plc?

This Fool runs the rule over J Sainsbury plc (LON SBRY). Does the acquisition of Home Retail Group plc (LON: HOME) make sense?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

As we head to one of the most important votes of our generation, there are tens of thousands of UK-based companies continuing about their business and reporting to the market, which is a key part of that business.

Sales in focus

This week there are two interesting companies that should be tying the knot during Q3 both reporting to the market. Sainsbury’s (LSE: SBRY), one of the big four supermarkets, and Argos owner Home Retail (LSE: HOME). While not naturally linked, Sainsbury’s has made an offer for Home Retail that has been accepted by the board and recommended to shareholders so the two should be looking for maximum synergies come Q3.

Since the offer was made earlier this year, Home Retail’s shares have (rather unsurprisingly) outperformed the wider market, so too have Sainsbury’s owing to a better than expected sales performance than was feared by the market. However, as can be seen by the chart, both of the shares have been falling of late, in line with a number of other retailers.

First up will be Sainsbury’s reporting on Wednesday. Investors will be hoping for signs of like-for-like sales improvement, which is unlikely given the downbeat view of Kantar Worldpanel on the major supermarkets published at the beginning of May. That said, under the leadership of CEO Mike Coupe, the group is showing signs of turning itself around with better than expected results revealed at the start of May.

Following Sainsbury’s on Thursday is Home Retail. Given the upcoming transaction with Sainsbury’s in the third quarter, any further deterioration in trading could impact on both share prices as the market may call into question the merits of the deal, especially due to the strength of rivals such as Amazon where growth is showing no signs of stopping.

Just Argos it?

All that said, despite the difficult environment across the retail sector, it doesn’t look to me that Sainsbury’s has overpaid for Argos and its infrastructure given that management believes the acquisition will be earnings enhancing in the first full year following completion. That’s despite the near-14% dilution that will be bought about by the issuance of 261m new shares during the third quarter.

In addition to the earnings enhancements, management believes it can bring about significant synergies (cost savings to you and I) as head office functions and infrastructure are merged, bringing about a leaner machine within the next three years.

Additionally, many Argos stores will be either closed or relocated as leases expire, meaning we should start to see much more in the way of Argos concession stores in our local Sainsbury’s store, which could boost sales.

Fighting on all fronts

However, as I’ve alluded to above, the sector is currently crowded, which in the end will mean survival of the fittest – whether that means disruptive businesses such as Amazon, or eBay, only time will tell.

Combine that with an ultra-competitive, not to mention deflationary, grocery sector and it means Sainsbury’s needs to be up for the challenge and executing the company strategy to the letter in order to stay competitive.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Dave Sullivan 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.

More on Investing Articles

Investing Articles

Now 70p, is £1 the next stop for the Vodafone share price?

The Vodafone share price is back to 70p, but it's a long way short of the 97p it hit in…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

If I’d put £5,000 in Nvidia stock at the start of 2024, here’s what I’d have now

Nvidia stock was a massive winner in 2023 as the AI chipmaker’s profits surged across the year. How has it…

Read more »

Light bulb with growing tree.
Investing Articles

3 top investment trusts that ‘green’ up my Stocks and Shares ISA

I’ll be buying more of these investment trusts for my Stocks and Shares ISA given the sustainable and stable returns…

Read more »

Investing Articles

8.6% or 7.2%? Does the Legal & General or Aviva dividend look better?

The Aviva dividend tempts our writer. But so does the payout from Legal & General. Here he explains why he'd…

Read more »

a couple embrace in front of their new home
Investing Articles

Are Persimmon shares a bargain hiding in plain sight?

Persimmon shares have struggled in 2024, so far. But today's trading update suggests sentiment in the housing market's already improving.

Read more »

Market Movers

Here’s why the Unilever share price is soaring after Q1 earnings

Stephen Wright isn’t surprised to see the Unilever share price rising as the company’s Q1 results show it’s executing on…

Read more »

Investing Articles

Barclays’ share price jumps 5% on Q1 news. Will it soon be too late to buy?

The Barclays share price has been having a great time this year, as a solid Q1 gives it another boost.…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

The AstraZeneca share price lifts 5% on a top-and-bottom earnings beat

The AstraZeneca share price reached £120 today and helped push the FTSE 100 higher. Would I still buy this flying…

Read more »