As I commented on the proposed acquisition of Home Retail by Sainsbury in previous blog posts (as a shareholder in the latter) here’s some on this mornings announcement.
In essence a deal has been agreed, with an offer equivalent to 161.3p in the hands of Home Retail shareholders. But that includes a capital return by Home Retail to their shareholders from the sale of Homebase which Sainsbury probably did not want anyway. The key justification for the deal is given later in the announcement where it says that “Sainsbury’s expects the Possible Offer will be accretive to its earnings per share in the first full year following completion. In the third full year following completion Sainsbury’s also expects the Possible Offer will result in double digit earnings per share accretion and a low to mid-teens return on invested capital (inclusive of implementation costs)”. If that stands up to scrutiny by institutional investors, this deal should go through without a hitch.
There is also more information on the “transaction rationale” which reads well and may convince you that the proposal makes sense, but I’ll repeat what I said previously: “In general acquisitions of complementary businesses which can be integrated with little management effort make sense. Those that require large scale restructurings of businesses with probably different cultures and customers, and which consume a lot of management, time do not. This proposal looks more like the latter than the former. That in essence is probably why so many independent commentators have not so far been convinced of the merits of this proposition. And this writer remains to be convinced also.”
It is surely true that to make this deal work, Sainsbury will have to extensively restructure Home Retail. But investors seem to be warming to the deal as the share price of Sainsbury rose in early trading this morning. Perhaps it is from relief that they don’t seem to be overpaying which often results from the pressure to do a deal once these things get in motion. But it may be a couple of years before we see whether the results match the expectations of the benefits of the acquisition.