Do Sainsbury's really want Homebase?

Earlier this week, Sainsbury’s shocked the city by announcing that in November they approached Home Retail Group with an offer to purchase them believed to be in the region of £1bn.

However, despite a detailed list of reasons as to why Sainsbury’s were interested in the group and the synergies that they believed were available, it was notable that Homebase did not feature. In fact, nowhere in the entire 2,000+ word statement was the Homebase brand even mentioned, despite the fact that it generates 25% of the groups sales.

If the deal goes ahead, and Sainsbury’s improve their offer, (which is now looking questionable based on input from some of Sainsbury’s largest shareholders), then we can assume that Homebase will be sold.

Simon Bowler, analyst at Exane BNP Paribas was quoted as saying“The statement notably excludes DIY as a core category, suggesting Sainsbury’s may look to dispose of  Homebase after the deal”.

If Homebase is sold, either as part of a Sainsbury’s acquisition or independently by HRG, then its value is under serious question. Various analysts have tried to estimate what it could be worth to an existing industry buyer or the more likely option of a private equity house. Claire Huff of RBC reckons the business could fetch less than £100m and a recent calculation done by RBC before this weeks bid, suggest that a HRG share price of 120p would value Homebase at zero.

Homebase has continued to struggle amid changes in consumers interest in doing DIY and the rapid growth of online competitors, who are successfully eating away at their market share.

In the meantime, Homebase continues with its three year ‘Productivity Plan’, a program designed to position the group for long term growth, which includes the closure of 80 of its stores. The plan is on target, with store numbers having already reduced from 323 to 271 in the last 12 months. However, in 2015, its profit margin was only 1.3% compared to Argos at 3.2% and B&Q at 6.6%.

Whatever the value, it will be a long way off the £1bn that Sainsbury’s received when it sold Homebase for £1bn to Schroder Ventures and some stores to B&Q in 2000.

If the Homebase business is sold, rivals such as B&Q, Wickes and The Range are likely to benefit, given the fact that Homebase is likely to be downsized even more aggressively under new ownership.

Sainsbury’s has until 2^nd February to make a revised offer for HRG or simply walk away and it will be fascinating to see what they decide to do.

Source: Steve Collinge - Managing Director - Insight Retail Group.